Part 1

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  • Topic: Loan, Interest, Annual percentage rate
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  • Published : May 22, 2011
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Course Project – Part I
Task 1: Assessing loan options for Air Jet Best Parts, Inc. The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks. BankAPRNumber of Times Compounded

National First Prime Rate + 6.75%Semiannually
Regions Best 13.17Monthly

1.Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (http://research.stlouisfed.org/fred2/). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts)

National First Bank:

EAR =[ ( 1 +{3.25 + 6.75%}/2 ) ^2 ]-1
EAR= [(1+10%/2)^2]-1
EAR= [(1.05)^2]-1
EAR=1.1025-1
EAR= 0.1025

EAR= 10.25%

Regions Best:

EAR =[ ( 1 +13.17%/12 ) ^12 ]-1
EAR =[ ( 1 +0.010975 ) ^12 ] -1
EAR =[ ( 1.010975 ) ^12 ] -1
EAR = 1.13995 - 1
EAR = 0.13995

EAR = 13.995%
EAR = 14%

2.Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

I would recommend National First Bank because the EAR is 10.25% where as the EAR for Regions Best is 13.995% or 14%. National First Bank is semiannually and although it has a prime rate (which is low), the APR is low as well compared to Regions Best. I would recommend National First Bank with an EAR of 10.25%.

3.Air Jet Best Parts, Inc. has decided to take a $6,950,000 loan being offered by Regions Best at 8.6% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. (20 pts)

$6,950,000 (loan amount) * 8.6%(interest rate) / 5(years)
$6,950,000* .086 /5
$597,700/5
$119,540

The monthly payment amount for this loan would be...
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