Question

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You were offered the opportunity to purchase either a simple interest note or a simple discount...

You were offered the opportunity to purchase either a simple interest note or a simple discount note with the following terms: $38,485 at 7% for 36 months.

a. Calculate the effective interest rate

Expert Solution

Simple note:

Amount of simple interest = Principal × Rate × Tenure

= $38,485 × 7% × (36 months / 12 months in a year)

= $38,485 × 7% × 3 years

= $8,081.85

Effective rate = {Amount of simple interest / (Note amount × 3 years)} × 100

= {8,081.85 / (38,485 × 3)} × 100

= (808,185 / 115,455)

= 7% (Answer)

Discount note:

Amount of simple interest = Principal × Rate × Tenure

= $38,485 × 7% × (36 months / 12 months in a year)

= $38,485 × 7% × 3 years

= $8,081.85

Net proceeds = Note amount – Simple interest

= 38,485 – 8,081.85

= $30,403.15

Effective rate = {Amount of simple interest / (Net proceeds × 3 years)} × 100

= {8,081.85 / (30,403.15 × 3)} × 100

= (808,185 / 91,209.45)

= 8.86% (Answer)

jeff jeffy answered 1 year ago

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You were offered the opportunity to purchase either a simple interest note or a simple discount...

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