Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $390,000, 90-day, 6% note or (2) issue a $390,000, 90-day note that the creditor discounts at 6%. 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) $390,000, 90-day, 6% interest-bearing note	$
(2) $390,000, 90-day note discounted at 6%	$

c. Alternative 1 is more favorable to the borrower because the borrower receives more cash .