Example
If a firm needs to borrow $15,000 for one year and the bank has a stated rate of interest of 12%, the firm will pay:
.12 x $15,000 = $1,800
The effective interest rate for each alternative is:
At maturity: $ 1,800 = .12 or 12%
In advance: $ 1,800 = $ 1,800 = .136 or 13.6%
($15,000-$ 1,800) $13,200
- 1994, HarperCollins Publishers