FinancialAnalysis of Interest
FinancialAnalysis of Interest
Theuse of interest rates in financial analysis is important inascertaining the financial costs that investors or borrowers arelikely to bear. It is always important to ensure that borrowersunderstand these burdens to be able to make concrete choices reliantupon their needs and desires (Sobecki, Bluman, Matthews, &Bluman, 2015). Below is an analysis of three different situationsthat take into consideration the simple and compound interests andannuity plans.
Steffenneeds to borrow $4,000 in order to cater for his medical bills. Thereare two important options from which to choose: bank offered simpleinterest with an 8% annual interest rate, and 24-month term. Secondoption is a credit union with 6% simple interest of a 3-year loan. Tofind the total amount in both cases the interest must be calculatedand added to the principle and the lesser amount will be the mostviable for the borrower.
Interestpaid on bank loan will be calculated following the formula:
WhereP – principle
Loan= (4000 * 8* 1)/100
Totalrepayment = P + Interest
Total= 4000 + 320 = $4320
Monthlyrepayments will be equal to 4640/12 = $360
Usingthe same formula the interest on the credit union loan will be equalto 4000 * 0.06 * 3 = $720.
Totalrepayment = 4000 + 720 = $4720. Monthly payments will be 4720/12 =$393.30
Basedon the computations, Steffens choice of the Union credit will costhim more from both the total charge and monthly charge perspective(Sobecki, Bluman, Matthews, & Bluman, 2015). Apart from the totalcharge considerations, other important factors that may influenceSteffen’s decision to choose credit options are the time torepayment and the monthly charge. These variables are critical inharnessing decision making and loan repayment.
Ingridwanted to finance her trip to the pacific and in a bid to do so shegot a loan of $1750 from her credit union with a 5% annual interestrate and monthly compounding. After the loan was due, she paid $1886.In a bid to calculate the time, it is imperative to use the compoundinterest rate formula (Lin & Wu, 2016):
WhereA – amount
1886= 1750 (1+ 0.05) t
T= 1.5 years
Thequestion addresses the situation of Jeremy who is trying to saveenough money in a bid to open an indoor skate board park. To ensurethat he successfully completes the task, he needs about $10,000 to besaved in three years. Thus, Jeremy opts to invest in a savingsannuity that has the ability to an interest charge of 6.5% and it iscompounded annually. In the problem it is imperative to find if thereis any form of monthly investments required and what payments willensure that Jeremy attain the $10,000 mark (Weaver, 2012). Theformula used to calculate the monthly investment is:
Basedon the computations attained by following the formula, the monthlyinstallments will be $75.13. This means that Jeremy must be able toinvest $75.13 in order to be able to save $10,000 after a period ofthree years (Weaver, 2012).
Inconclusion, interest rates, time payment and the monthly charges aresignificant factors borrowers ought to consider in making any creditdecisions. At the same time, it is imperative to assess the totalmonthly charges in order to satisfy the annuity requirements.
Lin,M. & Wu, Y. (2016). Interest conflicts, stock recommendations andinvestor attention. InternationalReview of Financial Analysis, 2(6),10-15. http://dx.doi.org/10.1016/j.irfa.2016.11.002
Sobecki,D., Bluman, A., Matthews, A., & Bluman, A. (2015). Mathin our world (3rded.). New York, NY: McGraw-Hill.
Weaver,S. (2012). Theessentials of financial analysis (1sted.). New York: McGraw-Hill.