Short Term Financing. Chapter 20. May 11, 2009. Learning Objectives. The need for short-term financing. The advantages and disadvantages of short-term financing. Three types of short-term financing. Computation of the cost of trade credit, commercial paper, and bank loans.
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May 11, 2009
Cost (interest + fees)
Amount you get to use
=Estimation of Cost of Short-Term Credit
Example: You borrow $10,000 from a bank, at a stated rate of 10%, and must pay $1,000 interest at the end of the year. Your effective rate is the same as the stated rate: $1,000/$10,000 = .10 = 10%
($10,000 - $1,000) = $9,000.
$ Net Borrowed Time
APR = $15 x 1 / 90 = 1.5% x 4 = 6.0%
Say you have a loan fee of $5.00, then
APR = $15 + $5 x 1/90 = 2.0% x 4 = 8.0%
$ interest you pay/ $ you get to use