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Unformatted text preview: in a slight incremental gain of $134,653 - $133,266 = $1,387. p. The brothers are considering taking out a 1-year bank loan for $100,000 to finance part of their working capital needs and have been quoted a rate of 8 percent. What is the effective annual cost rate assuming (1) simple interest, (2) discount interest, (3) discount interest with a 10 percent compensating balance, and (4) add-on interest on a 12-month installment loan? For the first 3 of these assumptions, would it matter of the loan were for 90 days, but renewable, rather than for a year? Answer: 1. With a simple interest loan, they gets the full use of the $100,000 for a year, and then pay 0.08($100,000) = $8,000 in interest at the end of the term, along with the $100,000 principal repayment. For a 1-year simple interest loan, the nominal rate, 8 percent, is also the effective annual rate....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08