B. Short term Funds PRINCESS Trading is engaged in the buying and selling of raw materials for sofa beds. The business is in need of funds to finance the operating activities of the business. The Partner Rural Bank is offering PRINCESS a loán of P500,000 for one year at 12% simple interest rate. Reguired: Compute the effective interest rate of the loan.
B. Short term Funds PRINCESS Trading is engaged in the buying and selling of raw materials for sofa beds. The business is in need of funds to finance the operating activities of the business. The Partner Rural Bank is offering PRINCESS a loán of P500,000 for one year at 12% simple interest rate. Reguired: Compute the effective interest rate of the loan.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:B. Short term Funds
PRINCESS Trading is engaged in the buying and selling of raw materials for sofa beds. The
business is in need of funds to finance the operating activities of the business.
The Partner Rural Bank is offering PRINCESS a loán of P500,000 for one year at 12% simple
interest rate.
Required: Compute the effective interest rate of the loan.
Transcribed Image Text:ILLUSTRATION2:
IZZY Merchandising borrowed P500,000 from Partners Bank at 15% simple interest for 90 days.
Required: Compute the effective interest of the bank loan.
Answer: the amount of interest for 90 days is computed as follows:
Interest = Principal x rate x time
= P500,000 x 15% x 90/360
= P18,750
Since the term of the loan is less than one year (90 days only). The effective annual interest rate under simple
interest is computed with the following formula:
EAR = (1+ PIR)PT-1
Where: PT = 4 (360-90 days)
PIR = 3.75% (15+4)
EAR = (1+ PIR)PT-1
= (1+0.0375) - 1
= 15.87%
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