Question

C. Cost of money.

10. A loan to the Bank for $ 1,200, at 8%, to 72 days was made by Kamila. The bank uses the discount method (it charges interest in advance). What was produced? What is the actual cost of the loan?

Answer 1

10. loan amount given = gross loan amount - interest charge (gross loan amount*interest rate*loan period/360)

loan amount given = $1,200 - ($1,200*8%*72/360) = $1,200 - ($96*72/360) = $1,200 - ($6,912/360) = $1,200 - $19.2‬ = $1,180.80.

loan is given for 72 days. so interest will also be charged for 72 days only. in banking transactions, a year is considered to have 360 days.

actual cost of the loan = interest charge/loan amount given = $19.2‬/$1,180.80 = 0.0163 or 1.63%

1.63% is the actual cost of the loan for 72 days.

actual annual cost of the loan = (1+0.0163)360/72 - 1 = 1.0163‬5 - 1 = 1.0842 - 1 = 0.0842 or 8.42%