XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after two months. This was the only change. How much interest must XYZ corporation pay?
A) $18,212
B) $2,476
C) $5,417
D) $21,500

Question

Quizplus · Accepted Answer

To calculate the interest we need to first calculate the interest rate for each month:

First two months: 
Prime rate + 2% = 8.5% + 2% = 10.5%

Remaining four months: 
Prime rate + 2% = 9% + 2% = 11%

Next, we need to determine the portion of the loan amount that was outstanding during each interest rate period:

First two months: $100,000 x 10.5% = $10,500 (total interest for first two months)

Remaining four months: $100,000 x 11% = $11,000 (total interest for remaining four months)

Total interest: $10,500 + $11,000 = $21,500

However, this is the total interest for six months, and we only need the interest for the actual duration of the loan, which is four months. Therefore, we need to prorate the total interest by dividing it by six and multiplying it by four:

$21,500 x (4/6) = $14,333.33

Therefore, the amount of interest XYZ Corporation must pay is $14,333.33, which is closest to option C, $5,417.

XYZ Corporation Borrowed $100,000 for Six Months from the Bank