# What is the effective cost of the bank loan, if a company could get the funds from the bank at a...

## Question:

What is the effective cost of the bank loan, if a company could get the funds from the bank at a rate of 8 percent and if the interest paid monthly is 1.2055% during the credit period?

## Effective Cost:

The total cost incurred after the interest is applied on a certain rate for a particular time period is said to be the effective cost.the interest applied can be either simple interest or compound interest.

## Answer and Explanation:

Given:

Rate of interest: 8%

Interest I =1.2055%

If *P* is the effective cost so according to the concept of simple interest

{eq}I=\frac{P\times R\times T}{100} {/eq}

Considering the time period of T=1 year

{eq}1.2055=\frac{P\times 0.08\times 1}{100} P=1.06.875 {/eq}

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from Financial Accounting: Help and Review

Chapter 5 / Lesson 18