A cheaper loan rate with a refinancing fee
Series X-A case study · set 2, case 3 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
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The case · stays here for all 5 questions
Priya has a ₹5,00,000 bullet loan: the full principal is repaid at maturity and no principal amortises before then. It has six months remaining and charges simple interest at 12% a year for that remaining period. Another lender offers the same principal and maturity at 9%, but charges an immediate non-refundable ₹10,000 refinancing fee. Assume no prepayment penalty, taxes or other costs and no interest earned on money used for the fee. For the break-even calculation only, allow the remaining term to vary while all other assumptions stay fixed. The lower headline rate is not enough to decide between the two offers.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Priya has a ₹5,00,000 bullet loan: the full principal is repaid at maturity and no principal amortises before then. It has six months remaining and charges simple interest at 12% a year for that remaining period. Another lender offers the same principal and maturity at 9%, but charges an immediate non-refundable ₹10,000 refinancing fee. Assume no prepayment penalty, taxes or other costs and no interest earned on money used for the fee. For the break-even calculation only, allow the remaining term to vary while all other assumptions stay fixed. The lower headline rate is not enough to decide between the two offers.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What remaining interest is due under the existing six-month loan?
Option A. ₹36,000
Why it is wrong: This applies the rate to an incorrect principal.
Option B. ₹60,000
Why it is wrong: This charges for a full year.
Option C. ₹22,500
Why it is wrong: This uses the proposed 9% rate.
Option D. ₹30,000 — Correct answer
Answer: D. ₹5,00,000 × 12% × 6/12 = ₹30,000. Remember: Match an annual rate to the actual time outstanding.
Hint, shown before you answer in practice mode: Apply annual simple interest for half a year.
XA-S2-C03-Q1easynumerical
Q2What total six-month financing cost does the new offer impose, including its fee?
Option A. ₹22,500
Why it is wrong: This omits the fee.
Option B. ₹32,500 — Correct answer
Option C. ₹55,000
Why it is wrong: This charges a full year of new interest plus the fee.
Option D. ₹30,000
Why it is wrong: This is the old loan’s cost.
Answer: B. ₹5,00,000 × 9% × 6/12 + ₹10,000 = ₹32,500. Remember: Compare borrowing costs after adding relevant one-off charges.
Hint, shown before you answer in practice mode: Add six months of new interest and the one-off fee.
XA-S2-C03-Q2mediumnumerical
Q3On these six-month assumptions, which offer costs less and by how much?
Option A. Refinance. It costs ₹7,500 less.
Why it is wrong: This compares interest only and ignores the ₹10,000 fee.
Option B. Refinance. It costs ₹2,500 less.
Why it is wrong: This reverses the cost difference.
Option C. Both cost the same.
Why it is wrong: Their total costs are ₹30,000 and ₹32,500.
Option D. Keep the existing loan. It costs ₹2,500 less. — Correct answer
Answer: D. The new offer costs ₹32,500 versus ₹30,000 for the existing loan: ₹2,500 more. Remember: A lower interest rate need not mean a lower total cost.
Hint, shown before you answer in practice mode: Compare total remaining costs, excluding principal common to both.
XA-S2-C03-Q3mediumnumerical
Q4At what remaining term does the fee exactly equal the interest saving?
Option A. 8 months — Correct answer
Option B. 6 months
Why it is wrong: Six months saves only ₹7,500 of interest.
Option C. 12 months
Why it is wrong: Twelve months saves ₹15,000, more than the fee.
Option D. 4 months
Why it is wrong: Four months saves only ₹5,000.
Answer: A. Monthly interest saving = ₹5,00,000 × (12% − 9%)/12 = ₹1,250. ₹10,000 ÷ ₹1,250 = 8 months. Remember: A refinancing break-even term compares upfront costs with periodic savings.
Hint, shown before you answer in practice mode: Each month saves principal × annual rate difference ÷ 12.
XA-S2-C03-Q4hardnumerical
Q5Why should Priya not add the ₹5,00,000 principal to only one offer’s cost comparison?
Option A. A bullet loan has no interest.
Why it is wrong: Both loans charge interest.
Option B. The refinancing fee cancels the principal.
Why it is wrong: The fee does not reduce the borrowed principal.
Option C. Both alternatives repay the same principal, so adding it to only one creates an unequal comparison. — Correct answer
Option D. Principal never needs to be repaid.
Why it is wrong: The case explicitly requires principal repayment.
Answer: C. Principal is common to both alternatives. The decision here turns on differences in interest and fees under the same repayment timing. Remember: Compare alternatives using consistent cash-flow boundaries.
Hint, shown before you answer in practice mode: Separate common cash flows from differences between choices.
XA-S2-C03-Q5mediumapplication
A rights issue and an investor’s choices
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