Question

19) Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 12%, payable at maturity. (Note: Assume a 365-day year.)

a.How much interest (in dollars) will the firm pay on the 90-day loan?

b.Find the 90-day rate on the loan

c.Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstances.

Answer 1

a.

Interest Paid = 10,000(0.12)(90/365)

Interest paid = $300

b.

Rate of 90-day = 0.12*90/365

Rate of 90-day = 2.96%

c.

Annualized Rate = (1.0296)^365/90 - 1

Annualized Rate = 12.56%