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Unsecured sources of short-term loans John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $45,000. John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors in 6 months. First Carolina Bank offers John two financing options for the $45,000 loan: a fixed-rate loan at 2.5% above prime rate or a variable-rate loan at 1.5% above prime.
Currently, the prime rate of interest is 6.5%, and the consensus interest rate
Using the forecast prime rate changes, answer the following questions.
- a. Calculate the total interest cost over 180 days for a fixed-rate loan.
- b. Calculate the total interest cost over 180 days for a variable-rate loan.
- c. Which is the lower-interest-cost loan for the next 180 days?
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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
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