Effective Annualized Cost of a Banker's Acceptance

[gimm]

The effective annualized cost (%) of a banker’s acceptance that has an all-inclusive annual rate of 5.25% for a one-month loan of $2,000,000 is closest to:
5.54%. 5.38%. 5.27%.
answer: http://i.imgur.com/bjwEWA7.png
I am curious though why on the denominator you take the Loan Amount and multiply by the (1 - effective rate)
Would someone care to walk me through a brief explanation?

 

[Oscar]

gimm wrote:
I am curious though why on the denominator you take the Loan Amount and multiply by the (1 - effective rate)

Because there are the proceeds. As the banker’s acceptance is delivered at a discount you effectively will only receive the amount after interests.