Effective Interest Rate Question

CPA Exam Review CPA Exam Forum BEC Exam Prep & Test Experience BEC Review Effective Interest Rate Question

This topic contains 2 replies, has 3 voices, and was last updated by CPALady18 CPALady18 3 months ago.

Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • #178898

    So in the Becker lectures, Olinto said that the interest rate is calculated as Interest paid per period / Net proceeds of loan. With that in mind…..

    Corbin, Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000. Transaction costs would be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, would be:

    a. 8.48%

    b. 8.65%

    c. 2.16%

    d. 8.00%

    The answer is a., which is computed as ([$1,000,000-980,000+1,200] / 980,000) * 4.

    Why wouldn't it be ([$1,000,000-980,000] / [980,000-1,200]) * 4? I feel like the transaction cost would be part of the net proceeds computation and not part of interest paid.

    Thanks!

    #2263437

    murano
    Participant

    and why it uses APR as the answer instead of EAR?
    I think the correct answer should be 20000/(980000-1200)=2.043% (1+2.043%)^4=8.42%
    Can someone explain this to me?

    AUD - NINJA in Training
    BEC - NINJA in Training
    FAR - 95
    REG - 99
    Hi 🙂
    #2264169
    CPALady18
    CPALady18
    Participant

    Hmmm. That's weird. I just had this question in Becker and the answer was B instead of A.

Viewing 3 posts - 1 through 3 (of 3 total)

You must be logged in to reply to this topic.


Would You Hate It If I Gave You $162.12 Of Free CPA Review Material That Will Help You…

1) Study Less

2) Avoid Common CPA Candidate Mistakes

3) Get Higher Scores

4) Spend More Time with Friends and Family

5) Finally Pass and Get On With Your Life?