Mostcom Co. is considering manufacturing protective cases for a popular new smartphone. Management decides to borrow Rp 100,000,000 from each of two banks, ABC Bank and JKL Bank. On the day that you visit both banks, the quoted prime interest rate is 6.5 %. Each loan is similar in that each involves a 90-day note, with interest to be paid at the end of maturity days. Assume a 365-day year.

ABC Bank. The interest rate was set at 1.5 % above the prime rate on ABC Banks fixed-rate note. Over the loan period, the rate of interest on this note will remain at the 1.5 % premium over the prime rate regardless of fluctuations in the prime rate.

JKL Bank. The bank sets its interest rate at 1 % above the prime rate on its floating-rate note. The rate charged over the loan period will vary directly with the prime rate.

For the ABC Bank loan:

a. Calculate the total dollar interest cost on the loan.

b. Calculate the interest rate on the loan.

c. Assume that the loan is rolled over each loan period throughout the year under identical conditions and terms. Calculate the effective annual rate of interest on the fixed-rate, ABC Banks note.

For the JKL Bank loan:

d. Calculate the initial interest rate.

e. Assuming that the prime rate immediately jumps to 8 % and after the first half of maturity it drops to 7.5 %, calculate the interest rate for the first half of maturity and the second half of maturity of the loan.

f. Calculate the total IDR interest cost.

g. Calculate the loan rate of interest.

h. Assume that the loan is rolled over each loan period throughout the year under the same conditions and terms. Calculate the effective annual rate of interest.

Conclusion

i. Which loan would you choose, and why ?