Asked by Bentou Sanoe on Jul 14, 2024
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Monica finished her program at New Brunswick Community College on June 3 with Canada Student Loans totalling $6,800. She decided to capitalize the interest that accrued (at prime plus 2.5%) during the grace period. In addition to regular end-of-month payments of $200, she made an extra $500 lump payment on March 25 that was applied entirely to principal. The prime rate dropped from 5% to 4.75% effective September 22, and declined another 0.5% effective March 2. Calculate the balance owed on the floating rate option after the regular March 31 payment. The relevant February had 28 days.
Canada Student Loans
Canada Student Loans are government-funded financial aids that assist Canadian students in paying for their post-secondary education.
Prime Rate
The interest rate that banks charge their most creditworthy customers, often used as a benchmark for other rates.
Floating Rate Option
An option in a financial instrument that allows for a variable interest rate that adjusts periodically with market conditions.
- Understand and calculate the effects of capitalizing interest on student loans.
- Assess the impact of fluctuating prime rates on loan balances.
- Analyze the financial implications of making lump sum payments on loan principals.
Verified Answer
Learning Objectives
- Understand and calculate the effects of capitalizing interest on student loans.
- Assess the impact of fluctuating prime rates on loan balances.
- Analyze the financial implications of making lump sum payments on loan principals.
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