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Question - Evaluating Alternative Notes - A borrower has two alternatives for a loan: (1) issue a $540,000, 120-day, 6% note or (2) issue a $540,000, 120-day note that the creditor discounts at 6%. Assume a 360-day year.
Required -
a. Calculate the amount of the interest expense for each option.
b. Determine the proceeds received by the borrower in each situation.
(1) $540,000, 120-day, 6% simple-interest
(2) $540,000, 120-day note discounted at 6%
c. Alternative ________ is more favorable to the borrower since the effective interest rate on alternative 1 is ________ and the effective rate on alternative 2 is ________.
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