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 $25,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on the loan will be .15 × $25,000 = $3,750. So the lender deducts this interest amount from the loan up front and gives you $21,250. In this case, we say that the discount is $3,750. What’s wrong here?
Step by Step Answer:
To find the APR and EAR we need to use the actual cash flows of the loan In other words the interes...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0071051606
8th Canadian Edition
Authors: Stephen A. Ross, Randolph W. Westerfield
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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