Problem 16-10: Unsecured sources of short-term loans. John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $45,000. John needs the money to cover start-up costs in a new business. He hopes to have sufficient banking from other investeros by the end of the next 6 months. First Carolina Bank offers John two financing options for the $45,000 loan: A fixed-rate loan at 2.5% above prime rate, or a variable-rate loan at 1.5% above prime. Currently, the prime rate of interest is 6.5%, and the consensus forecasts of a group of mortgage economists for changes in the prime rate over the next 180 days are as follows: 60 days from today the prime rate will rise by 0.5%; 90 days from today the prime rate will rise another 1%; 180 days from today the prime rate will drop by 0.5%. Using the forcast prime rate changes, answer the following questions. a. Calculate the total interest cost over 180 days for a fixed-rate loan. b. Calculate the total interest cost over 180 days for a variable-rate loan. c. Which is the lower-interest cost loan for the next 180 days?
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