In a discounted note a company borrowed $3,000 for one year at an interest rate of...

In a discounted note a company borrowed $3,000 for one year at an interest rate of 3.5%. What was the effective rate of interest?

A. 3.6%

B. 4.0%

C. neither A or B

Expert Solution

Price of the note = Amount borrowed * (1 - interest rate)

Price of the note = 3,000 * (1 - 0.035)

Price of the note = 3,000 * 0.965

Price of the note = $2,895

The effective rate of interest = Amount borrowed/Price of the note - 1

The effective rate of interest = 3,000/2,895 - 1

The effective rate of interest = 1.0362694301 - 1

The effective rate of interest = 0.0362694301

The effective rate of interest = 3.62694301%

The effective rate of interest = 3.6%

Option A is correct

jeff jeffy answered 2 years ago

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