Harjap Completed His Program at Nova Scotia Community College in December

question 48

Essay

Harjap completed his program at Nova Scotia Community College in December. On June 30, he paid all the interest that had accrued (at prime plus 2.5%) on his $5,800 Canada Student Loan during the 6-month grace period. He selected the fixed rate option (prime plus 5%) and agreed to make end-of-month payments of $95 beginning July 31. The prime rate began the grace period at 4% and rose by 0.5% effective March 29. On August 13, the prime rate rose another 0.5%. The relevant February had 28 days.
a) What amount of interest accrued during the grace period?
b) Calculate the total interest paid in the first three regular payments, and the balance owed after the third payment.

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Definitions:

Time Value

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Call Option

An agreement in finance that grants the purchaser the option, but not the requirement, to purchase a certain asset like a stock, bond, commodity, or similar at a predetermined price during a defined timeframe.

Black-Scholes Model

A mathematical model for pricing an options contract by determining the option's expected value or price in the financial market.

Stock's Price

The current price at which a specific stock is bought or sold on the stock market.