Question

Juan Solez, a prominent painter, takes out a simple discount note for one year from River National Bank for $5,000. The annual rate of interest is 8%. What is the amount of: (A.) Bank discount; (B.) Proceeds ; (C.) Effective rate of interest (to nearest tenth percent)

Answer 1

SOLUTION;-

-;GIVEN DATA;-

6) In case of a discounted note (lets say of $100), bank deducts its Interest (@10%, $10) immediately anase of a non-discounted note, bank would give you the full amount ($100) and you pay the principal along d pays you the remaining amount ($90) and you only pay the principal amount ($100) on maturity. Whereas in cwith interest later on ($110).

Therefore, in our case -

(A.) Bank discount;

Bank Discount = $5000 x 8% = $400
(B.) Proceeds

Proceeds = $5000 - $400 = $4600 (As bank would deduct amount immediately

(C.) Effective rate of interest (to nearest tenth percent

[9:54 AM, 4/17/2019] Sreekanth Anna: Now, if this was a non-discounted note you are paying interest $400 and receiving full $5000. So, Effective interest would be 8% (400 / 5000). But, in case of a discounted note you are receiving only $4600 for use. Therefore, Effective Interest would be -

Effective Interest Rate = $400/ $4600 * 100 = 8.695652173% or 8.70%(rounded off)