Question

RT is about to loan his granddaughter Cynthia $18,000 for 1 year. RT’s TVOM, based upon his current investment earnings, is 12%, and he has no desire to loan money for a lower rate. Cynthia is currently earning 8% on her investments, but they are not easily available to her, and she is willing to pay up to $1,440 interest for the 1-year loan.

1) How much does RT require in interest?

2) How much is Cynthia going to earn?

3) Should they be able to successfully negotiate the terms of this loan within these parameters? Yes/No

Answer 1

(1)

It has been provided that RT earns 12% on his current investments and would not like to receive an interest rate of less than 12% on the loan he gives.

So, if RT gives a loan of $18,000 for one year, he would charge an interest rate of minimum 12%.

Calculate the interest -

Interest = $18,000 * 0.12 = $2,160

Thus,

RT requires $2,160 in interest.

(2)

It has been provided that Cynthia earns 8% on her investment.

If she borrows $18,000 and invests the amount for one year, she can earn 8% return on such amount.

Calculate the earning -

Earning = $18,000 * 0.08 = $1,440

Thus,

Cynthia is going to earn $1,440

(3)

RT requires a minimum of $2,160 as interest for 1-year loan he gives while Cynthia can pay a maximum of $1,440 as interest for 1-year loan she takes.

So, there is mismatch between the minimum expectation to receive of lender and the maximum expectation to pay of borrower.

Thus,

They should not be able to successfully negotiate the terms of this loan within these parameters.