Question

Your company plans to borrow $14 million for 12 months, and your banker gives you a
stated rate of 20 percent interest
Calculate the elective rate of interest for the following types of loans.
a. Simple 20 percent interest with a 8 percent compensating balance. (Use 365 days o
year Round the final answer to 2 decimal places.)
Effective rate
b. Discounted interest. (Use 365 days a year. Round the final answer to 2 decimal
places-)
Effective rate
c. An installment loan (12 payments)- (Round the final answer to 2 decimal places.)
Effective rate

d. Discounted interest with a 1 percent administration fee. (Round the final answer to 2
decimal places.)

effective rate

Answer 1

a)	Total amount to be borrowed = 14000000/(1-8%) =	$   1,52,17,391
	Interest = 15217391*20% =	$ 30,43,478
	Effective interest rate = 3043478/14000000 =	21.74%
b)	Total amount to be borrowed = 14000000/(1-20%) =	$   1,75,00,000
	Effective interest rate = 17500000/14000000-1 =	25.00%
c)	EIR = (1+0.20/12)^12- 1=	21.94%
d)	Total amount to be borrowed = 14000000/(1-21%) =	$   1,77,21,519
	EIR = 17721519/14000000-1 =	26.58%

REVISED SOLUTION FOR [C]

c]	Effective rate on installment loan = 2 X Annual # of payments X Interest/(Total no. of payments + 1) X Principal
	=2*12*2800000/(13*14000000) =	36.92%