Bill needs to borrow $24,000 now to pay for personal expenses. Bill would like to pay back the 1) loan as a single lump sum amount 3 years from now. Bank of USA charges 18% per year compounded monthly on personal loans. American Bank charges 16.5% per year compounded daily on personal loans, but has a 5% (of the original loan amount) administrative fee that needs to be paid upfront. However, the bank is willing to allow Bill to roll the administrative fee into the loan amount; i.e., the bank will loan Bill the original amount plus the administrative fee. Both banks have agreed to a single lump sum payment at the end of three years. Which option should Bill choose and why? Show all work.
Bill needs to borrow $24,000 now to pay for personal expenses. Bill would like to pay back the 1) loan as a single lump sum amount 3 years from now. Bank of USA charges 18% per year compounded monthly on personal loans. American Bank charges 16.5% per year compounded daily on personal loans, but has a 5% (of the original loan amount) administrative fee that needs to be paid upfront. However, the bank is willing to allow Bill to roll the administrative fee into the loan amount; i.e., the bank will loan Bill the original amount plus the administrative fee. Both banks have agreed to a single lump sum payment at the end of three years. Which option should Bill choose and why? Show all work.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Bill needs to borrow $24,000 now to pay for personal expenses. Bill would like to pay back the
1)
loan as a single lump sum amount 3 years from now. Bank of USA charges 18% per year compounded monthly
on personal loans. American Bank charges 16.5% per year compounded daily on personal loans, but has a 5%
(of the original loan amount) administrative fee that needs to be paid upfront. However, the bank is willing to
allow Bill to roll the administrative fee into the loan amount; i.e., the bank will loan Bill the original amount
plus the administrative fee. Both banks have agreed to a single lump sum payment at the end of three years.
Which option should Bill choose and why? Show all work.
Expert Solution
Step 1
The future value is the amount that will be received at the end of a certain period. In simple words, the future value is the amount received at the end of a certain period for the investment made in the current period.
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