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1. A company obtained a short term loan from a bank. Information about such loan is as follows: Principle of loan: P 5M Inter
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Answer #1

1) Principle amount = $5million
time = 1 year
rate= 10%

therefore, interest to be paid = 10%*5million = $500,000

Now in a discounted loan, the bank would pay themselves the interest amount, i.e $500000. So the company will walk out of the bank with 5million - 500000= $4.5 million but in essence the company will still owe $5million.
therefore effective interest rate will be, Rate = interest/ effective amount borrowed

= 500000/4500000 = 11.11%

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