barelystayingsane on "Effective Interest Rate Question"

So in the Becker lectures, Olinto said that the interest rate is calculated as Interest paid per period / Net proceeds of loan. With that in mind.....

Corbin, Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000. Transaction costs would be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, would be:

a. 8.48%
b. 8.65%
c. 2.16%
d. 8.00%

The answer is a., which is computed as ([$1,000,000-980,000+1,200] / 980,000) * 4.

Why wouldn't it be ([$1,000,000-980,000] / [980,000-1,200]) * 4? I feel like the transaction cost would be part of the net proceeds computation and not part of interest paid.

Thanks!