On 1/1/2004, the Fluffy Finance Co. made a $1,000,000 loan to one of its clients. The loan interest rate was 12%, to be paid monthly (meaning 1% per month), with full repayment of the loan on 1/1/2005.
Because the client anticipated cash flow problem during July and August, Fluffy Finance agreed to forego interest payments during these months.
a. Compute the annualized rate of return earned by Fluffy Finance on the loan?
b. Another client has asked for a similar loan, but has asked to forgo interest payments in may and June. If Fluffy can make only one of the loans, which should it make?