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Evaluating Alternative Notes
A borrower has two alternatives for a loan: (1) issue a $360,000, 60-day, 9% note or (2) Issue a $360,000, 60-day note that the creditor discounts at 9%.
Assume a 360-day year.
a. Compute the amount of the interest expense for each option.
$
X for each alternative.
b. Determine the proceeds received by the borrower in each situation.
(1) $360,000, 60-day, 9% simple-interest
(2) $360,000, 60-day note discounted at 9%
c. Alternative 1
alternative 2 is 9.14%
Feedback
Vis more favorable to the borrower since the effective interest rate on alternative 1 is 9%
✓and the effective rate on
Check My Work
A 360-day year is used when calculating interest on a note. Recall the definition of proceeds is the amount that the borrower receives in cash or merchandise.
Consider amount of money available for use. Consider the effective interest rate for each method.
