This question illustrates what is known as discount interest. Imagine you are discussing a loan with a
Question:
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 14.5 percent. You and the lender agree that the interest on the loan will be .145 × $20,000 = $2,900. So the lender deducts this interest amount from the loan up front and gives you $17,100. In this case, we say that the discount is $2,900. What’s wrong here?
Step by Step Answer:
The time line for the cash flows is To find the APR ...View the full answer
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Related Video
Interest, debt, finance, and capital markets are all important concepts in the world of economics and business. Interest is the cost of borrowing money, and it is typically expressed as a percentage of the amount borrowed. Debt is the money that is borrowed, and it has to be repaid with interest. Finance is the study of how individuals, companies, and organizations manage their money and investments. Capital markets are the places where companies and governments can raise money by selling stocks and bonds to investors. These markets play an important role in the overall economy by helping to fund investment and growth.
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