[dovebar12]

A borrower has two alternatives for a loan (1) issue a $90,000, 90-day, 6% note or (2) issue a $90,000, 90-day note that the creditor discounts at 6%

a. Calculate the amount of the interest expense for each option
b. determine the proceeds by the borrower in each situation
c. which alternative is more favorable to the borrower. Explain.


a. Well I calculated the amount for the interest expense for each option. It would be $1,350

For option 1) it would look like this:
Notes payable 90,000
Interest Expense 1,350
Cash 91,350

For option 2) I believe would look something like this:
Note 88,650
Interest Expense 1,350
Notes Payble 90,000

b. I know the proceeds for option 2 would be 88,650. What would the proceeds be for option 1?

c. I can't remember during class which alternative is better. Could someone please explain for me?

[Gooberholic]

I believe for option 1 that the proceeds would be: $91,350- as for a note issued just with interest- the interest is added to the value of the note at maturity.
As for part c- the best option is the one that brings in the greatest profit- which would be option a- the interest note.

[Gooberholic]

So I did a little more research nad found out that I was incorrect- the proceeds for option one is the face value of the note. You were correct for option two. Hopefully this helped :)