ToysToys Corporation wants to borrow $500,000 for one month. It uses its inventory as collateral for a 16% (APR)loan, under a warehouse arrangement where the warehouse fee is $14,000, paid at the end of the month. What is the EAR of this loan for ToysToys?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) considers the interest and fees over the period. The monthly interest is 16%/12 = 1.33%. The warehouse fee is $14,000 on a $500,000 loan, which is 2.8% for the month. The total monthly cost is 1.33% + 2.8% = 4.13%. The EAR is (1 + 0.0413)^12 - 1 = 62.6%.

ToysToys Corporation Wants to Borrow $500,000 for One Month