A firm will borrow $1 million for six months on a discount basis.The annual interest rate on the loan is 12%.What is the annual percentage cost of the loan?

Question

Quizplus · Accepted Answer

The interest charged on the loan for six months is:

= 1,000,000 * 0.12 * (6/12)
= $60,000

The amount repaid by the firm at the end of the six months is:

= 1,000,000 - 60,000
= $940,000

The cost of the loan is the interest charged as a percentage of the amount borrowed, expressed on an annual basis. Thus,

= (60,000 / 1,000,000) * (12/6) * 100%
= 12.77%

Therefore, the annual percentage cost of the loan is 12.77%, which is closest to option B.

A Firm Will Borrow $1 Million for Six Months on a Discount