- CFA Exams
- CFA Level I Exam
- Study Session 11. Corporate Finance (2)
- Reading 35. Working Capital Management
- Subject 5. Managing Short-Term Financing

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**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%.

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**User Contributed Comments**
1

User |
Comment |
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NickGerli |
Isn't C calculated on add-on basis? |