Response to the following problem:
You are the owner and operator of grain plus located at bathrust NSW. The rain during the spring have been the best in a decade and you are expecting a bumper wheat crop. This has prompted you to rethink your current financing source.
According to your past experience, you believe there is a need for additional $.2,40,000/- for the three months period ending with the close of the harvest season. After meeting with your business banker, you are bit puzzled over. What the additional financing will actually cost. The banker has quoted you an annual interest rate of 1% over reserve bank of australlia cash rate. (let us assume its currently 3% per annum.) and has also requested the firm increase its current bank balance of $4,000/- upto 20% of loan.
(a) If interest and principle are all repaid at the end of the three month term, what is the annual percentage rate on the loan offer make by the bank.
(b) If the bank were to offer to lower the rate to the reserve bank of Australia cash rate, if interest is discounted should you accept this alternative?