Effective Interest Rate Question

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

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  • #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.




    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 🙂

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

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