Question

Colburn corporation is requesting a loan of $9.50 million to buy some agricultural equipments. The nine-month load is priced by farmer's financial corporation @ 7.50% per annum. However the finance company tells colburn that it is willing to price the load at 7% p a

. if colburn obtains suiatable drcdit guarantee Life time bank agrees to selll colburn a financial guaranteee for $10000

What should colburn do and why?

Answer 1

(Note: Time period = 9/12 months = 0.75, Interest rate savings = Loan amount * Time period * Difference in interest)

The amount of $35,625 exceeds $10,000 (the purchase amount of the financial guarantee). Hence it is beneficial to take up the credit guarantee to save the interest cost on the loan. Colburn should buy the guarantee.