Question

Melvin Indecision has difficulty deciding whether to put his savings in Mystic Bank or Four Rivers Bank. Mystic offers 10% interest compounded semiannually. Four Rivers offers 8% interest compounded quarterly. Melvin has $10,000 to invest. He expects to withdraw the money at the end of 4 years.

Which bank gives Melvin the better deal? Check your answer.

Use the attached excel sheet to prepare Sue’s bank reconciliation.

Problem 12-15: Which bank gives Melvin the better deal?

MYSTIC BANK

Table 12-1

Interest Compound Rate Principal Value Future Value

/ = #DIV/0! * = $- 0

Years Compound Periods Future Value Principal Interest Earned

* = 0 - = $- 0

FOUR RIVERS BANK

Table 12-1

Interest Compound Rate Principal Value Future Value

/ = #DIV/0! * = $- 0

Years Compound Periods Future Value Principal Interest Earned

* = 0 - = $- 0

Joe Levi bought a home in Arlington, Texas, for $140,000. He put down 20% and obtained a mortgage for 30 years at 5 ½ %.

What is Joe’s monthly payment?

What is the total interest cost of the loan? To calculate follow the steps in your textbook : LU 15-1 (page 378)

If the rate of interest is changed to 7 ½ %, what is the difference in interest cost?

Problem 15-11: What is Joe Levi's monthly payment and total interest cost?

What is the monthly payment?

Purchase Price Down Payment Principal

- = $- 0

Principal / 1000 Table Factor

(Table 15.1) Monthly Payment

* = $- 0

What is the total interest?

Monthly Payment Total Payments Mortgage Cost

* = $- 0

Mortgage Cost Principal Total Interest

- = $- 0

Problem 15-12: If the rate of interest is 7 1/2%, what is the difference in interest cost?

What is the monthly payment?

Purchase Price Down Payment Principal

- = $- 0

Principal / 1000 Table Factor

(Table 15.1) Monthly Payment

* = $- 0

What is the total interest?

Monthly Payment Total Payments Mortgage Cost

* = $0.00

Mortgage Cost Principal Total Interest

- = $- 0

Total Interest at

7 1/2% Total Interest

at 5 1/2% Difference in Interest Cost

- = $- 0

Answer 1

1.

Mystic Effective annual rate=(1+10%/2)^2-1=10.25%

Fourtivers Effective annual rate=(1+8%/4)^4-1=8.2432%

hence, Mystic is giving a better deal

2.

At 5.5%

Joe's mOnthly payment=PMT(5.5%/12,12*30,140000*(1-20%))=635.92

Total Interest cost=635.92*12*30-140000*(1-20%)=116931.2

At 7.5%

Joe's mOnthly payment=PMT(7.5%/12,12*30,140000*(1-20%))=783.12

Total Interest cost=783.12*12*30-140000*(1-20%)=169923.2

Hence, difference in interest cost=169923.2-116931.2=52992