Cull Incorporated recently borrowed $250,000 from Century Bank when the prime ra

Question

Cull Incorporated recently borrowed $250,000 from Century Bank when the prime rate was 4%. The loan was for 90 days with interest to be paid at the end of the period with a rate fixed at 1.5% above the prime rate. What is the total interest paid on this loan and what is the effective annual rate? (Assume a 365 day year.) The total interest paid is $3390.41 and the effective annual rate is 1.36%. The total interest paid is $13,750 and the effective annual rate is 5.55%. The total interest paid is $13,750 and the effective annual rate is 5.62%. The total interest paid is $3390.41 and the effective annual rate is 5.62%.

Explanation / Answer

Interest paid = 250000*5.5%*90/365 i.e 3390.41 and the effective annual interest rate = 1.36%

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