Meridian credit union approved a $500 000 line of credit on a demand basis to Hard Steel to finance the import of raw material. Interest at the rate of prime plus 1% is charged to Hard Steel's chequing account at the bank on the 1st of each month. The initial advance was $300 000 on 1st of June, 2016, when the prime rate stood at 3%. There were further advances of $40 000 on July 13 and $100 000 on July 28. Payments of $70 000 each were applied against the principal on August 15 and September 15. What was the total interest paid on the loan for the period June 1 to October 1?
A) $4590.68
B) $1380.82
C) $2807.67
D) $4064.66

Question

Quizplus · Accepted Answer

The correct answer is A.The total interest paid on the loan for the period June 1 to October 1 is $4590.68. This is calculated as follows:Interest on initial advance of $300,000 for 31 days (June 1 to July 1) = $300,000 x 3.01% x 31/360 = $752.50Interest on advance of $40,000 for 18 days (July 13 to July 31) = $40,000 x 3.01% x 18/360 = $102.60Interest on advance of $100,000 for 13 days (July 28 to August 10) = $100,000 x 3.01% x 13/360 = $276.25Interest on balance of $370,000 for 31 days (August 11 to September 11) = $370,000 x 3.01% x 31/360 = $927.50Interest on balance of $300,000 for 30 days (September 12 to October 1) = $300,000 x 3.01% x 30/360 = $752.50Total interest paid = $752.50 + $102.60 + $276.25 + $927.50 + $752.50 = $4590.68

Meridian Credit Union Approved a $500 000 Line of Credit