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Cull Incorporated recently borrowed $250,000 from Century Bank when the prime rate was 4%. The loan was for 90 days with interest to be paid at the end of the period with a rate fixed at 1.5% above the prime rate. What is the total interest paid on this loan and what is the effective annual rate?
Solution: Amount borrowed = $250,000 Interest rate = 4% + 1.5% = 5.5% per annum TIme period = 90 days = 3 months = (3/12) years Simple interest to be paid =…

/100)*Time = (250,000)*(5.5/100)*(3/12) = $3437.50 Effective annual rate = = (1 + (0.055/4)^4 – 1 = 0.0561 or 5.61%

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