discount loan method

[babygirl1501]

A commercial loan extended to CIBER-LAND Corporations for 2.5 million assesses as interest charge of 350,000 up front. Using the discount loan method of calculating loans rates, what is the effective interest rate on this loan? Suppose that instead of deducting the interest owed up front, the company lender agrees to extend the full 2.5 million and add the amount of interest owed to the face amount of CIBER’s note. What then is the loan’s effective interest rate?

I subtracted 2,500,000- 350,000 = 2,150,000 then 350,000/2,150,000= 16.27% ( interest rate on the loan)

2,500,000 * .1627 interest rate = 406,750.00 Then i added to the 2,500,000 = 2,906,750 then I took 2,906,750 / 2,500,000 = 1.16% ( is this correct for figuring the the interest rate when the interest is added to the original principle?

 

[babygirl1501]

I ment the last post is 116.27% I had put the decimal in the wrong place

 

[babygirl1501]

I think i did the second half wrong. I think I need to take the 406,750.00/2,906750.00 = 13.99%

 

[Denis]

Your problem is incomplete: the loan's term (length) is required.
Like, I'll gladly pay you 350,000 anytime you wish if you lend me 2.5 million for 20 years :wink:

 

[babygirl1501]

I sorry I forgot to add that the loan term lenght is for 1 year.

 

[Denis]

( is this correct for figuring the the interest rate when the interest is added to the original principle?

No. Calculation is 350000 / 2500000 = .14 ; 14%

On this:
> I subtracted 2,500,000- 350,000 = 2,150,000 then 350,000/2,150,000= 16.27% ( interest rate on the loan)

Correct, BUT you need more precision: 350,000/2,150,000= .1627906...16.279%

 

[Denis]

I ment the last post is 116.27% I had put the decimal in the wrong place

You should realise that's impossible; 100% means interest of $2,500,000 (!), so 116.27% is still worse...