[NinaSun]

Elan Corporation is considering borrowing $100,000 from a bank for one year rate of 9 percent. What is the effective interest rate to Elan if this borrowing is in the form of a discounted note?

a. 10.00 percent

b. 8.10 percent

c. 9.89 percent

d. 9.81 percent

The answer is c. (9%*100,000)/(100,000-9%100,000). I dont understand why deduct interest from proceeds. They didnt say the interest is paid at the beginning of the loan. In most case, the denominator only deducted by loan origination fee or a documentary fee by which to get net inflow at the beginning of the loan. Is it usually the case that we need to deduct interest? Is effective interest rate is the same as debt pre-tax cost?

AUD-74,75 11/2014
REG-80 04/2015
FAR-74, 91 11/2015
BEC-79 08/2015