A borrower has two alternatives for a loan: (1) issue a $480,000, 60-day, 8% note or (2) issue a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for interest calculations.) Required: a. Calculate the amount of the interest expense for each option. $ for alternative (1) $ for alternative (2) b. Determine the proceeds received by the borrower in each situation. Alternative 1 $ proceeds Alternative 2 $ proceeds

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A borrower has two alternatives for a loan: (a) issue a $480,000, 60-day, 8% note or (2) issue a $520,000, 120-day note that the creditor discounts at 12%. (Assume a 360-day year is used for interest calculations.)

Alternative 1

$6,400

$473,600

Alternative 2:

$20,800

$ 499,200

Explanation:

The interest expense=loan amount*interest rate*number of days/360

Alternative 1

loan amount is $480,000

interest rate is 8%

number of days is 60 days

interest expense=$480,000*8%*60/360=$6400

Proceeds=face value of the loan-interest expense=$480,000-$6,400

Alternative 2

loan amount is $520,000

interest rate is 12%

number of days is 120 days

interest expense=$520,000*12%*120/360 =$ 20,800.00  

Proceeds=face value of the loan-interest expense=$520,000-$20,800=$ 499,200.00  

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