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11 March, 02:25

Mark McClennan signed a simple discount note for $2,950 for 100 days at a rate of 8.5%.

Find the effective interest rate based on the proceeds received by McClennan.

8.8%

8.5%

8.6%

8.7%

+5
Answers (1)
  1. 11 March, 02:46
    0
    To get the effective interest rate (EIR) of the loan, determine first whether we will use a simple interest method or a discounted method. In this case, we will use a discounted method because the loan is a discounted one. In a discounted method, interest is deducted from the loan principal. So the formula will look like this:

    EIR = Interest : (Principal - Interest)

    Before proceeding any further, solve first for interest. (assuming a 360-day year)

    Interest = Principal * rate * interest

    = $2950 * (100/360) * (0.085)

    = $69.65

    Thus, EIR can be computed as follows:

    EIR = ($69.65 : ($2950 - $69.65)) * 360

    ≈ 8.7%

    Notice that the EIR was multiplied by 360 to return it to an annual rate.
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