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Topic
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Beta Company has arranged to borrow $10,000 for 180 days. Beta will repay the principal amount plus $600 in interest at the maturity of the note.
Which one of the following is the annual percentage rate (APR) of interest that Beta is paying on the loan?
A. 3.0%
B. 6.0%
C. 12.0%
D. 16.6%
C is correct. The calculation of annual percentage rate (APR) is a function of the basic equation: Interest = Principal x Interest Rate x Time period of loan. Rearranged, the interest rate on an annual basis (APR) is:
APR = Interest / (Principal x Time fraction of year)
Using the facts above, the APR is computed as:
APR= 600 / [10,000*(180/360)]
APR = .06 x 360/180 = .06 x 2 = 12%
Why do you use 360 days when there are 365 days in a year?
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