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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Anita has a loan outstanding of Rs 8,00,000 on which the lender charges 10% p.a. She also has a fixed deposit earning a post-tax 6% p.a. and has Rs 2,00,000 spare. Ignoring any prepayment charges and tax benefits on the loan, what is the annual net gain in cash terms from using the Rs 2,00,000 to prepay the loan instead of keeping the deposit (before considering liquidity)?

The net annual gain is Rs 8,000. Prepaying Rs 2,00,000 saves loan interest of 10%, which is Rs 20,000, but gives up post-tax deposit income of 6%, which is Rs 12,000. The difference of Rs 8,000 is the benefit, before considering the loss of liquidity.

  1. ARs 8,000Correct
  2. BRs 12,000
  3. CRs 20,000
  4. DRs 32,000

Explanation

Interest saved on Rs 2,00,000 at 10% = Rs 20,000. Deposit income forgone at 6% = Rs 12,000. Net gain = 20,000 - 12,000 = Rs 8,000. Rs 12,000 is only the income forgone; Rs 20,000 ignores the lost deposit income.

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