The Momley Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Momley 4.5% on a discounted basis.What is the annual percentage rate (APR)to Momley (round to the nearest .1%)?

Question

Quizplus · Accepted Answer

The APR on a discounted loan is calculated by dividing the interest by the principal minus the interest, then annualizing the result. Here, the interest is $50 million * 4.5% = $2.25 million. The effective amount received is $50 million - $2.25 million = $47.75 million. The APR is ($2.25 million / $47.75 million) * (365 / 180) = 4.71%.

The Momley Company Will Borrow $50 Million for 180 Days