Part 1 Essay Example
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.
Bank APR Number of Times Compounded
National First Prime Rate + 6.75% Semiannually
Regions Best 13.17 Monthly
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
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.
Bank APR Number of Times Compounded
National First Prime Rate + 6.75% Semiannually
Regions Best 13.17 Monthly
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