Simpson Conglomerates borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Simpson paying a total of $12,400.What is the approximate cost of credit using the APY,or annual percentage yield,calculation?
A) 4.33%
B) 10.34%
C) 12.25%
D) 12.46%

Question

Quizplus · Accepted Answer

The cost of credit can be calculated using the formula for APY, which is: APY = (1 + r/n)^n - 1, where r is the interest rate per period, and n is the number of periods. However, for a simple approximation suitable for this question, we can use a simpler approach: Interest Paid / Principal Amount = (12400 - 12000) / 12000 = 400 / 12000 = 0.0333 or 3.33% for 120 days. To annualize this rate (since APY is an annual rate), we multiply by the number of periods in a year (365/120 = 3.04166). So, 3.33% * 3.04166 ≈ 10.13%, which is closest to option B, 10.34%. The slight difference is due to rounding and the approximation method used.

Simpson Conglomerates Borrows $12,000 for a Short-Term Purpose