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# FM27 30 - (discount interest 92,000 With a financial...

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2. On a discount interest loan, the bank deducts the interest from the face amount of the loan in advance; that is, the bank "discounts" the loan. If the loan had a \$100,000 face amount, then the 0.08(\$100,000) = \$8,000 would be deducted up front, so the borrower would have the use of only \$100,000 - \$8,000 = \$92,000. At the end of the year, the borrower must repay the \$100,000 face amount. Thus, the effective annual rate is 8.7 percent: Effective rate = 000 , 92 \$ 000 , 8 \$ = 0.087 = 8.7%. Note that a timeline can also be used to calculate the effective annual rate of the 1-year discount loan: 0 1 | | i = ? 100,000 -100,000 -8,000
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Unformatted text preview: (discount interest) 92,000 With a financial calculator, enter n = 1, PV = 92000, pmt = 0, and FV = -100000 to solve for i = 8.6957% ≈ 8.7%. 3. If the loan is a discount loan, and a compensating balance is also required, then the effective rate is calculated as follows: Amount borrowed = 1 . 08 . 1 000 , 100 \$ − − = \$121,951.22. 0 1 | | i = ? 121,951.22 -121,951.22 - 9,756.10 (discount interest) 12,195.12-12,195.12 (compensating balance) -109,756.10 100,000.00 With a financial calculator, enter n = 1, PV = 100000, pmt = 0, and FV = -109756.10 to solve for i = 9.7561% 9.76%. Mini Case: 27- 30...
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