General Manufacturing wants to borrow $1 million for three months. It uses its inventory as collateral for an 11% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $12,000 paid at the start of the three months. What is the EAR of this loan for General Manufacturing?

Question

Quizplus · Accepted Answer

C) Using a financial calculator: PV = $1,000,000, I = 11 / 12 = 0.9167, N = 3; compute FV = $1,027,752.85; amount received = $1,000,000 - $12,000 = $988,000; actual rate = $1,027,753 / $988,000 = 1.0402; EAR = 1.0402⁴ - 1 = 0.171 = 17.1%

General Manufacturing Wants to Borrow $1 Million for Three Months