19-16. The Ohio Valley Steel Corporation has borrowed $5 million for o

QUESTION

19-16. The Ohio Valley Steel Corporation has borrowed $5 million for one month at a stated annual rate of 9%, using inventory stored in a field warehouse as collateral. The warehouser charges a $5,000 fee, payable at the end of the month. What is the effective annual rate of this loan?Ohio Valley is
The monthly interest rate is 9% / 12 = 0.75%, so Ohio Valley Steel must pay 0.0075 $5,000,000 =$37,500 in interest on the loan. Combining this with the $5,000 warehouser fee makes the monthlycost of the loan $42,500. Since the fee is paid at the end of the month, Ohio Valley Steel

as use of thefull $5,000,000 for the month. The interest rate per period is $42,500 / $5,000,000 = 0.85%. There are12 months in a year, so the effective annual rate is (1.0085) 12 1 = 10.7

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