Hi,

I could not get one of the effective rate question right, can someone help me?  Thanks

Corbin Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000.  Transaction costs would  be $1,200.  The effective annualized percentage cost of the financing, based on a 360-day year, would be:

a. 2.16%

b. 8.48%

c. 8.65%

d. 8.00%

The answer is 8.65%

My calculation was (20,000/96,800) * 4 = 8.26%.  I know my calculation is not correct, but what is the problem? ( I tried to follow Becker B3-33 Example)

I always try to figure out how to get to the answer.  When I tried to do that for this question.  It looks like you forgot to add the transaction costs to the interest so the total cost is 21200.  Then you divide that by 980000.  Then you multiply that by 4.  Then you get 8.65%.  I'm not sure if that is the correct way, but I got 8.65%.

cpaorbust thanks!!

How would you calculate the following question (example on Becker B3-33):

A $10,000 promissory note has a stated rate of 10 percent per annum and is due in one year.  The bank charges a loan orinination fee of $75 and the state in which the loan is made levies a $50 documentary stamp charge.  Taxes and fees are taken from loan proceeds.  The effective interest rate is computed as follows:

Interest paid (10,000 X 10%) / Proceeds (10,000-75-50) = 10.12%

I am confused here.  Transaction cost is added to interest (the previous question), but loan costs are reduced from proceeds?????? 

Well, it seems as though in this question you need to calculate what the borrower got in proceeds, so you subtract the fees.  In the other question you were trying to calculate the total cost to the borrower so you add the fees.