Iowa Technologies (IT) approached its bank for a 30-day loan. The bank said it c

Question

Iowa Technologies (IT) approached its bank for a 30-day loan. The bank said it could lend IT up to $300,000 using a discount interest loan with a simple interest of 9 percent and no compensating balance requirement. Computer the loan's (a) APR and (b) rEAR. IT would borrow the maximum amount for 30 days. Iowa Technologies (IT) approached its bank for a 30-day loan. The bank said it could lend IT up to $300,000 using a discount interest loan with a simple interest of 9 percent and no compensating balance requirement. Computer the loan's (a) APR and (b) rEAR. IT would borrow the maximum amount for 30 days. Iowa Technologies (IT) approached its bank for a 30-day loan. The bank said it could lend IT up to $300,000 using a discount interest loan with a simple interest of 9 percent and no compensating balance requirement. Computer the loan's (a) APR and (b) rEAR. IT would borrow the maximum amount for 30 days.

Explanation / Answer

Discount interest loan means the interest is deducted in begining of the loan itself and rest is given as loan

interest=300,000*9%*(30/360)=$2,250

Loan given= 300,000-2250=$297,750

30 days interest rate=2250/297750=0.76%

the APR for loan is 0.76%*(360/30)=9.07%

EAR=[(1+0.76%)^(360/30)]-1

=9.45%

EAR=[(1+0.75%)^4]-1

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