BUS 420 Problem_22-3_Solution

# BUS 420 Problem_22-3_Solution - Problem-Chapter 22-3 Del...

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Problem-Chapter 22-3 Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of \$50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate? a . A 12% annual rate on a simple interest loan with no compensating balance required and interest due at the end of the year. Interest paid = \$50,000 x 12% = \$6,000 With a financial calculator, (setting 1_p/yr) enter N = 1, PV = 50000, PMT = -6000, and FV = -50000 to solve for I/YR = 12.00%. Effective rate = (Interest paid/Amount received=6,000/50,000=12%) NOTE: this equation only works for loans of one year. b . A 9% annual rate on a simple interest loan, with a 20% compensating balances required and interest due at the end of the year. Compensating balance =\$50,000 * 20% =10,000 0 1 | | 50,000 -50,000 - 4,500 -10,000 (compensating balance) 10,000 40,000 -44,500 With a financial calculator, (setting 1_p/yr) enter N = 1, PV = 40000, PMT = 0, and

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## BUS 420 Problem_22-3_Solution - Problem-Chapter 22-3 Del...

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