Question

Determine the annual financing cost of a 6-month (182-day) 20,000 discounted bank loan at a stated annual interest rate of 10 percent. Assume that no compensating balance is required.

Answer 1

10.52%

Step-by-step explanation:

The computation of the annual financing cost is shown below:

First we have to calculate the interest cost that is shown below:

= $20,000 × 10% × 182 days ÷ 365 days

= $997.26

Now the used funds is

= $20,000 - $997.26

= $19,003

Now the annual financing cost is

= ($997 ÷ $19,003) × (365 days ÷ 182 days)

= 10.52%

We assume there are 365 days in a year