It is a custom that Banks reduce the interest on the loan if interest rates declined in the country before .the loan was fully repaid Taking this opportunity Fareed decided to borrow $13000 from the bank, which he will repay in six equal end-of-year payments at 8%. Later, At the end of 3 years, at the time of the third payment, the bank reduced the interest rate from 8% to 7% on the .remaining debt As a result, the amount of the equal annual end-of- year payments for each of the first 3 years and the amount of the equal annual end-of-year payments :for each of the last 3 years are

It is a custom that Banks reduce the interest on the loan if interest rates declined in the country before .the loan was fully repaid Taking this opportunity Fareed decided to borrow $13000 from the bank, which he will repay in six equal end-of-year payments at 8%. Later, At the end of 3 years, at the time of the third payment, the bank reduced the interest rate from 8% to 7% on the .remaining debt As a result, the amount of the equal annual end-of- year payments for each of the first 3 years and the amount of the equal annual end-of-year payments :for each of the last 3 years are

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 19P

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Companies frequently borrow money under an arrangement that requires them to make periodic payments of “interest only” and then pay the principal all at once. If Cisco International borrowed $500,000 (identified as loan A) at 10% per year simple interest and another $500,000 (identified as loan B) at 10% per year compound interest and paid only the interest at the end of each year for three years on both loans, (a) on which loan did the company pay more interest, and (b) what was the difference in interest paid between the two loans?
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