Question

Sanders Co. is planning to finance an expansion of its operations by borrowing $54,500. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $5,450 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 12 percent for each option.

Required

1. What amount of interest will Sanders pay in year 1 under option 1 and under option 2? (Round your final answers to the nearest dollar amount.)

	Amount of Interest
Under option 1
Under option 2

2. What amount of interest will Sanders pay in year 2 under option 1 and under option 2? (Round your final answers to the nearest dollar amount.)

	Amount of Interest
Under option 1
Under option 2

Answer 1

a. Amount of Interest Sanders pay in year 1 Under option 1 and option 2
Under option 1
Principal due	$54,500
Rate of Interest	12%
Anount of Interest	$6,540 ($54,500 x 12%)
Under Option 2
Principal due	$54,500
Rate of Interest	12%
Anount of Interest	$6,540 ($54,500 x 12%)
b. Amount of Interest Sanders will pay in year 2 Under option 1 and option 2
Under option 1
Principal due	$54,500
Rate of Interest	12%
Anount of Interest	$6,540 ($54,500 x 12%)
Under Option 2
Principal due	$49,050 ($54,500 (-) $5,450)
Rate of Interest	12%
Anount of Interest	$5,886 ($49,050 x 12%)