Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual inter

Question

Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.)
a. How much interest (in dollars) will the firm pay on the 90-day loan?
(Insert Answer Here)
b. Find the 90-day rate on the loan.
(Insert Answer Here)
c. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstances.
(Insert Answer Here)

Explanation / Answer

a. Int on 90 days loan = 10000*15%*(90/365) = $370 b. 90 day rate = 370/10000 = 3.70% c. EAR = (1+i/4)^4 - 1 = (1+3.7%)^4 -1 =15.64%

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