Question

A company has a choice between taking a $231k loan or accepting a cash discount terms 2.78/18, net 76. A creditor will loan the money for 2 years at an interest cost of $12.4k. The creditor requires a 21% compensating balance. However, the company ordinarily maintains 50% of that requirement. If the company takes the loan, it must provide monthly payments to retire the obligation. Note: The term “k” is used to represent thousands (× $1,000). Required: What is the absolute percentage difference in the effective rate of interest (ERI) between the two alternatives? Answer % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Answer 1

Sol:

To determine absolute percentage difference in the effective rate of interest (ERI) between the two alternatives is as follows,

Left out period	58
Discount rate	2.78%
Total no of days	365
Effective rate of interest of cash discount	19.41%
Loan amount	$231,000
Interest amount	$12,400
Total payment	$243,400
Periods (12*2)	24
Monthly Payments	$10,141.67
Monthly rate	0.42%
Effective rate of interest on loan	5.19%
Percentage difference	14.22%

Therefore absolute percentage difference in the effective rate of interest (ERI) between the two alternatives is 14.22%