Question

The Olivera Corp., a manufacturer of olive oil products, needs to acquire Lit 100 million in funds today to expand a pimento‑stuffing facility. Banca di Roma has offered them a choice of an 11 percent loan payable at maturity or a 10 percent loan on a discount basis. Which loan should Olivera choose?

Answer 1

11% percent loan payable at maturity i.e. effective interest rate is 11%

for 10 percent loan on a discount basis i.e. on $90 you need to pay $100 as repayment amount including interest or $10 interest

Hence, interest rate=10/90=11.11%

Hence, for the second case EAR is more.

Hence, Oliver should choose 11% loan payable at maturity.