Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $240,000, 60-day, 8% note or (2) issue a $240,000, 60-day note that the creditor discounts at 8%. 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) $240,000, 60-day, 8% simple-interest	$
(2) $240,000, 60-day note discounted at 8%	$

c. Alternative Select12Item 4 is more favorable to the borrower since the effective interest rate on alternative 1 is Select8%8.11%Item 5 and the effective rate on alternative 2 is Select8%8.11%Item 6 .