Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $450,000, 90-day, 9% note or (2) issue a $450,000, 90-day note that the creditor discounts at 9%. Assume a 360-day year.

a. Calculate the amount of the interest expense for each option. $fill in the blank 1 for each alternative.

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

Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $450,000, 90-day, 9% note or (2) issue a $450,000, 90-day note that the creditor discounts at 9%. Assume a 360-day year.

a. Calculate the amount of the interest expense for each option. $fill in the blank 1 for each alternative.

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

(1) $450,000, 90-day, 9% interest-bearing note	$fill in the blank 2
(2) $450,000, 90-day note discounted at 9%	$fill in the blank 3

c. Alternative

12

is more favorable to the borrower because the borrower

receives more cash pays more interest has an extension of time to pay

c. Alternative

12

is more favorable to the borrower because the borrower

receives more cash pays more interest has an extension of time to pay