Computation of the effective interest rate on the loan

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Reference no: EM1312592

Computation of the effective interest rate on the loan payable in due and in advance

On July 1, 2007, Leach Company needs exactly $103,200 in cash to pay an existing obligation. Leach has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Leach is unsure, however, whether to ask the bank for a) an interest-baring loan with interest and principle payable at the end of the year or b) a loan due in one year but with interest deducted in advance.

Calculate the effective interest rate on the note assuming that

a. Interest is paid when the loan is due

b. Interest is deducted in advance

Reference no: EM1312592

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