CAT IR - Loan Options - just a suggestion...

[nyc917]

Hi guys,

I am not sure if it's just me, but the wording for the second part of the question was not very clear (maybe it was intentional?).

Original question below:

"A business needs a $240,000 loan for one year and has two options to decide between. Option 1 is a fixed rate loan for the entire amount, with a simple annual interest rate of 5%. Option 2 involves two loans: a fixed rate loan for $190,000, with a simple annual interest rate of 4%, and a second fixed rate loan for $50,000, with a simple annual interest rate of r%. Both options have otherwise identical terms and require payment in full of interest and principal at the end of the year.

In the first column, identify the interest rate r% at which the two options require the same total interest payment. In the second column, identify the interest rate r% at which the annual interest on the $190,000 loan in Option 2 would be exactly twice the annual interest on the $50,000 loan. Make only two selections, one in each column."

The confusion was that the question stem did not specify that the $190,000 has an interest of 4%. I only knew about the 4% until after reading the solution. With this 4%, the answer became a lot more clear.

[tim]

it says it right there in the text of the problem. please read the quote you posted!

[nyc917]

it says it right there in the text of the problem. please read the quote you posted!

Ok, Tim. i spent 10 minutes typing a thread as a friendly suggestion and you asked me to read what i wrote. OF COURSE I KNOW WHAT I TYPED. it was just confusing when I was taking the CAT. Perhaps other students can comprehend the question better.

[RonPurewal]

hey --

it was just confusing when I was taking the CAT.

in general, this sort of confusion tends to stem from a lack of organization.

when you see a problem stem that's dense with quantitative information -- like the one here -- you should try to make some sort of organizational device to keep it all straight. a table, a chart, even a list ... something.
basically, you should do everything within your human powers to avoid having to read paragraphs of quantitative information. (as an illustration of just how big the difference is, imagine finding your favorite sports team in a normal chart of league standings. fast and easy, right? now imagine how long the same thing would take if the standings were written in paragraphs.)

try it again, this time making some sort of chart.
e.g., "(loan amt) x (interest %) = (interest amt)" across the columns, and then a row for each different loan or part of a loan.
you should find that it's a lot easier to keep the information straight.

[ChiomaA629]

I have to agree with the original post, I think this question was unclear. I ended up trying to find a new interest rate for $190,000 that would generate an interest of $8,800(4,400*2). Even when reviewing without any time pressure, I still could not figure out what I was doing wrong until I looked at the answer.

As the original author said - perhaps it was intentional.

[RonPurewal]

again, the problem is that everything is in a giant paragraph. paragraphs are a terrible vehicle for mathematical information.

if you extract the information from the paragraph, and THEN do any and all mathematical work, you'll find that this sort of thing becomes a lesser issue.

[RonPurewal]

...and where did you get 4400 x 2? i can't find an immediate explanation for that one, so i'm curious.