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.)

A) The total interest paid is $3390.41 and the effective annual rate is 5.62%.
B) The total interest paid is $13,750 and the effective annual rate is 5.62%.
C) The total interest paid is $13,750 and the effective annual rate is 5.55%.
D) The total interest paid is $3390.41 and the effective annual rate is 1.36%.

points awarded to right answer

Explanation / Answer

Cull paid at 4+1.5 = 5.5% per annum

Loan was for 90 days.

Hence, total interest paid = $250,000 * 5.5% * 90/365 = $ 3390.41

and effective interest rate per annum would be (1+ 5.5%/4)^4 -1 = 1.05614 - 1 = 5.62% = Answer = a)

I am sure of this!

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