You need to borrow funds for three months but can only get a discount loan with an annual stated rate of interest of 7%. If you need to have $10,000 in cash, how much should you borrow?

Question

Quizplus · Accepted Answer

To get $10,000 in cash from a discount loan, you calculate the amount to borrow by dividing the needed amount by 1 minus the interest rate for the period. The interest for three months (1/4 of a year) at 7% annually is 1.75% (0.0175). So, you divide $10,000 by (1 - 0.0175) = $10,000 / 0.9825 = $10,177.71, which rounds to $10,178.

You Need to Borrow Funds for Three Months but Can