Which of the following one-year $ 1000 bank loans offers the lowest effective annual rate?
a. A loan with an APR of 6.3 %, compounded monthly. b. A loan with an APR of 6.3 %, compounded annually, that also has a compensating balance requirement of 10.2 % (on which no interest is paid), or c. A loan with an APR of 6.3 %, compounded annually, that has a 1.3 % loan origination fee.
a. A loan with an APR of 6.3 %, compounded monthly Since the APR is 6.3%, the monthly rate is _____? This translates to an effective annual rate of______?
b. A loan with an APR of 6.3 %, compounded annually, that also has a compensating balance requirement of 10.2 % (on which no interest is paid).
The compensating balance is______? Therefore, the borrower will have use of only_______ of the $ 1,000?
The interest is_______? The interest rate per period is______?
Since this alternative assumes annual compounding, the effective annual rate is_______; as well.
c. A loan with an APR of 6.3 %, compounded annually, that has a 1.3 % loan origination fee.
The interest expense is_______and the loan origination fee is_______? The loan origination fee reduces the usable proceeds of the loan to_______; because it is paid at the beginning of the loan. The interest rate per period is_______?
Since the loan is compounded annually, the effective annual rate is________?
Which option offers the lowest effective annual cost, A, B, or C?