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A borrower has two alternatives for a loan: (1) issue a $300,000, 120-day, 8% note or (2) issue a $300,000, 120-day note that the creditor discounts at 8%. Assume a 360-day year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 17P

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Question

A borrower has two alternatives for a loan: (1) issue a $300,000, 120-day, 8% note or (2) issue a $300,000, 120-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) $300,000, 120-day, 8% interest-bearing note	$
(2) $300,000, 120-day note discounted at 8%	$

c. Alternative is more favorable to the borrower because the borrower .

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