Question

business-accounting question. thanks

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.)

Required:

(1)	Calculate the amount of the interest expense for each option.
(2)	Determine the proceeds received by the borrower in each situation.
(3)	Which alternative is more favorable to the lender? Explain.

Answer 1

1	Loan Amount	480,000
	Number of Days	60
	Discount Rate	8%
	Interest amount = Principal x rate x number of days/360	6,400
	Loan Amount	520,000
	Number of Days	120
	Discount Rate	12%
	Interest amount = Principal x rate x number of days/360	20,800
2	Proceeds received by each borrower
a)	480000-6400	473,600
b)	520000-20800	499,200
3	Alternative b is more favorable as the discount on which it is lending the money is 12% which is more than 8% hence earning more interest on the loan.