Nick is a full-time college student who plans to graduate in 10 months. He works a limited number of hours each week to pay for car insurance, but he can't work more hours due to his class schedule. He is choosing between two 6-year student loans for $15,000 each. • Loan 1 has a 2.5% annual interest rate with a $224.57 monthly payment. Monthly payments are required immediately. • Loan 2 has monthly payments that are not required for 1 year, but interest accrues during that time. The annual interest is 3.5% compounded monthly. Then $238.56 monthly payments are made for 6 years. The loan Nick chooses will pay his tuition and living expenses, and it will also give him an extra $75 per month. Which loan should Nick choose and why? Nick should choose Loan 1 because the interest rate and the monthly payment are both lower. This means the total interest paid for this loan would be lower than the other one. Nick should choose Loan 2 because no interest accrues during the first year. This means if he makes payments during that time, he would significantly decrease the total amount he repays. Nick should choose Loan 1 because he should not wait to make payments on a loan that is accruing interest. He would pay less in interest if he starts paying immediately. Nick should choose Loan 2 because he cannot afford the other loan payment with his current monthly budget. He would benefit from the delayed repayment date even though he would pay greater interest.
Nick is a full-time college student who plans to graduate in 10 months. He works a limited number of hours each week to pay for car insurance, but he can't work more hours due to his class schedule. He is choosing between two 6-year student loans for $15,000 each. • Loan 1 has a 2.5% annual interest rate with a $224.57 monthly payment. Monthly payments are required immediately. • Loan 2 has monthly payments that are not required for 1 year, but interest accrues during that time. The annual interest is 3.5% compounded monthly. Then $238.56 monthly payments are made for 6 years. The loan Nick chooses will pay his tuition and living expenses, and it will also give him an extra $75 per month. Which loan should Nick choose and why? Nick should choose Loan 1 because the interest rate and the monthly payment are both lower. This means the total interest paid for this loan would be lower than the other one. Nick should choose Loan 2 because no interest accrues during the first year. This means if he makes payments during that time, he would significantly decrease the total amount he repays. Nick should choose Loan 1 because he should not wait to make payments on a loan that is accruing interest. He would pay less in interest if he starts paying immediately. Nick should choose Loan 2 because he cannot afford the other loan payment with his current monthly budget. He would benefit from the delayed repayment date even though he would pay greater interest.
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
Related questions
Question
Transcribed Image Text:Nick is a full-time college student who plans to graduate in 10 months. He works a limited number of hours each week to pay for car insurance, but he can't work more
hours due to his class schedule. He is choosing between two 6-year student loans for $15,000 each.
• Loan 1 has a 2.5% annual interest rate with a $224.57 monthly payment. Monthly payments are required immediately.
• Loan 2 has monthly payments that are not required for 1 year, but interest accrues during that time. The annual interest is 3.5% compounded monthly. Then
$238.56 monthly payments are made for 6 years.
The loan Nick chooses will pay his tuition and living expenses, and it will also give him an extra $75 per month.
Which loan should Nick choose and why?
Nick should choose Loan 1 because the interest rate and the monthly payment are both lower. This means the total interest paid for this loan would be lower than
the other one.
Nick should choose Loan
because no interest accrues during the first year. This means if he makes payments during that time, he would significantly decrease
the total amount he repays.
Nick should choose Loan 1 because he should not wait to make payments on a loan that is accruing interest. He would pay less in interest if he starts paying
immediately.
Nick should choose Loan
because he cannot afford the other loan payment with his current monthly budget. He would benefit from the delayed repayment date
even though he would pay greater interest.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education