Question

A company issued a short-term note payable to a bank with a stated 12 percent rate of interest . The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be

Answer 1

Answer:

17%

Explanation:

If a company issued a short-term note payable to a bank with a stated 12 percent rate of interest and in addition the bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be 17%

The effective annual interest rate is the interest rate that is actually earned or paid on an investment, loan or other financial product.

Hence, since the company is both paying the initial 5% and the later 12%, effectively the company is paying 17% on the note payable.

Answer 2

Answer:

B) More than 12.5%

Explanation:

Loan origination fees lower the amount of money that a borrower receives and increases the total interest paid. In this case, the borrower received 99.5% of the total loan amount. If the buyer has to pay 12% interest on the total amount of the loan, he/she will be actually paying more interest than the stated amount.

For example, the total loan value is $100, but you will receive only $99.50. You have to pay $12 in interests for the loan, so the actual interest paid = ($12 + $0.50) / $99.50 = 12.56%