Evaluating Alternative Notes

A borrower has two alternatives for a loan: (1) issue a $360,000, 60-day, 5% note or (2) issue a $360,000, 60-day note that the creditor discounts at 5%. Assume a 360-day year.

a. Calculate the amount of the interest expense for each option. $ for each alternative.

b. Determine the proceeds received by the borrower in each situation.

(1) $360,000, 60-day, 5% simple-interest	$
(2) $360,000, 60-day note discounted at 5%	$

c. Alternative 1 is more favorable to the borrower since the effective interest rate on alternative 1 is 5% and the effective rate on alternative 2 is 5.04% .