Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $360,000, 90-day, 7% note or (2) issue a $360,000, 90-day note that the creditor discounts at 7%. Assume a 360-day year.

a. Calculate the amount of the interest expense for each option. $_____ for each alternative.

b. Determine the proceeds received by the borrower in each situation.

(1) $360,000, 90-day, 7% simple-interest	$_____
(2) $360,000, 90-day note discounted at 7%	$_____

c. Alternative ____ (options: 1 or 2) is more favorable to the borrower since the effective interest rate on alternative 1 is ____ (options: 7% or 7.12%) and the effective rate on alternative 2 is ____ (options: 7% or 7.12%).