CFA Practice Question
eRetailer.com is borrowing $1 million at 10% for a year on a discount basis with a bank. How much of the funds are available for use? What is the effective cost of interest?
A. $1,000,000; 10.0%
B. $900,000; 10.0%
C. $900,000; 11.1%
Explanation: On a discount basis, the interest is subtracted from the amount borrowed ($1 million - $100,000 interest) and the effective cost is $100,000 / $900,000 = 11.1%.
User Contributed Comments 1
| User | Comment |
|---|---|
| NickGerli | Isn't C calculated on add-on basis? |