1. How much would Zoe
(a) Receive in initial loan proceeds
(b) Be required to repay at maturity under the Tennessee State Bank loan?
2. Compute
(a) The finance charges
(b) The APR on the loan offered by Tennessee State Bank.
3. Compute
(a) The finance charges
(b) The APR on the loan offered by the National Bank of Knoxville. How big a loan payment would be due at the end of two years?
4. Compare your findings in Questions 2 and 3, and recommend one of the loans to Zoe. Explain your recommendation.
5. What other recommendations might you offer Zoe regarding disposition of the loan proceeds?
At age 19, Zoe Trainor is in the middle of her second year of studies at a community college in Charlotte. She has done well in her course work; majoring in pre-business studies, she currently has a3.75 grade point average. Zoe lives at home and works part-time as a filing clerk for a nearby electronics distributor. Her parents can't afford to pay any of her tuition and college expenses, so she's virtually on her own as far as college goes. Zoe plans to transfer to the University of Tennessee [Go Vols!] next year.(She has already been accepted.) After talking with her counselor, Zoe feels she won't be able to hold down a part-time job and still manage to complete her bachelor's degree program at UT in two years. Knowing that on her 22nd birthday, she will receive approximately $35,000 from a trust fund left her by her grandmother; Zoe has decided to borrow against the trust fund to support herself during the next two years. She estimates that she'll need $25,000 to cover tuition, room and board, books and supplies, travel, personal expenditures, and so on during that period. Unable to qualify for any special loan programs, Zoe has found two sources of single-payment loans, each requiring a security interesting the trust proceeds as collateral. The terms required by each potential lender are as follows:
a. Tennessee State Bank will lend $30,000 at 6 percent discount interest. The loan principal would be due at the end of two years.
b. National Bank of Knoxville will lend $25,000 under a two-year note. The note would carry a7 percent simple interest rate and would also be due in a single payment at the end of two years.