Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find amount borrowed by Surreal Corp.

Question

Business

Sanai

16 January, 19:56

Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find amount borrowed by Surreal Corp.

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Valerie Wilkins · Answer 1

The rate at which to discount the payments to find sum borrowed is 12.68%

Explanation:

The discount rate to be used in computing the sum borrowed can e derived from the effective annual rate formula below:

Effective annual rate = (1 + Quoted interest rate/m) ^m - 1

quoted interest rate is 8.40

m is the number of months in a year when compounding is done which is 12

effective annual rate = (1+8.40%/12) ^12-1

effective annual rate = (1+0.01) ^12-1

effective annual rate = (1.01) ^12-1

effective annual rate=1.12682503 - 1

effective annual rate=0.12682503=12.68%