Question

The SKC Corporation plans to borrow $1,000 for a 90-day period. At maturity the firm will...

The SKC Corporation plans to borrow $1,000 for a 90-day period. At maturity the firm will repay the $1,000 principal amount plus $50 interest. The effective annual rate of interest for the loan can be estimated using the APR equation, as follows:

***Please solve this with clear steps***

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Homework Answers

Answer #1

360 days in a year is considered.

Effective Annual Rate = ((1+APR/n)^n) - 1

APR = (Interest / Principal) * (360 / no of days)

= (50 / 1000) * (360 / 90)

= 20%

Effective Annual Rate = (1+APR/n)^n

n = 360 / 90 = 4

= ((1+0.20/4)^4 ) - 1

= ((1.05)^4) - 1

= 1.21550625 -1

= 21.55%

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