Question

RUSS Inc. needs cash to purchase more rental property, and borrows $268,000 cash on a 3-year, $300,000, 4%, semi-annual note from a family friend. From a recent inquiry into a similar loan from a local bank, RUSS knows that its market rate is 8%. Which of these interest rates should the lender use to calculate the amount of interest it will receive in cash:

Answer 1

Answer:

The lender should use 4%, semi-annual rate in order to calculate the amount of interest it will receive in cash.

Explanation:

Since RUSS Inc. has already borrowed money at a 4%, semi-annual note from a family friend, it is irrelevant what the market rate is after RUSS has taken the loan. RUSS Inc. will pay and the lender will receive interest on the mutually agreed rate according to their agreement.