Question

Wogharts Corp. is planning to borrow $12,000 for one year. a. What is the effective rate of interest if they borrow from a bank that offers an 11.75 percent discount interest loan? b. What is the effective rate of interest if they borrow from a bank that offers a 10.50 percent add-on, one-year installment loan, payable in 4 equal quarterly payments?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

ДА В с 1 Discount loan Amont Discount rate Interest Amount Principal Amount Effective rate of interest $12,000.00 11.75% $1,410.00 $10,590.00 13.31% 2 Loan Amount Interest rate Quarterly payment (add on) $12,000.00 10.50% $3,315.00 Quarterly rate 4.12% Effective rate of interest 17.51% 17

Cell reference -

B 2 1 Discount loan Amont Discount rate Interest Amount Principal Amount Effective rate of interest 12000 0.1175 =C2*C3 =C2-C4 =C4/C5 8 2 Loan Amount Interest rate Quarterly payment (add on) 12000 0.105 =C8/4+C8*C9/4 Quarterly rate =RATE(4,-C10, C8,0) Effective rate of interest =(1+C12)^4-1

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.