Question

I offer to borrow money from you for 90 days at the following interest rate quotations: a discount rate of 5%. a simple interest money market rate of 5.04%. a ""bond equivalent"" yield (simple interest 365 day) rate of 5.11%. Which is the better deal from your point of view? Explain your calculations or reasoning.

Answer 1

Answer:

A has a higher return, so the better deal from your point of view is a discount rate of 5%.

Explanation:

Suppose you are supposed to borrow $100.

A. You will get 95 after a discount of 5%, and after 90 days, and pay the $100 back.

The effective return for me = 5/95 = 5.26%

B. Return = 5.04%

C. 90 day return = 5.11%/4 = 1.278%

Therefore, A has a higher return, so the better deal from your point of view is a discount rate of 5%.