Suppose a company borrowed $1 million at a rate of 9%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would the firm have to pay in a 30-day month? What would the interest be if the bank used a 365-day year? [(0.09/360)

(30) ($1,000,000) = $7,500 interest for the month. For the 365-day year,

(0.09/365)(30)($1,000,000) = $7,397.26 of interest. The use of a 360-day year raises the interest cost by $102.74, which is why banks like to use it on loans.]

AppendixLO1