Question

Paul and Frank each borrow $1,757 for 6 months.

Paul's loan uses the simple discount model while Frank's loan uses the simple interest model. The annual simple discount rate on Paul's loan is 12.3%.

What would the annual simple interest rate have to be on Frank's loan if their maturity values are the same?

Answer 1

Paul Discount Rate

Discount Money = Future Value * discount Rate * time

Discount Money = (1757 - Discount Money) * 0.123 * 6 / 12

Discount Money = (1757 - Discount Money) * 0.0615

Discount Money = 101.80

Discount is same as interest

Now, Frank's loan

As per simple interest

For Frank Rate = Interest * 100 / Principle * Time

= 101.80 * 100 / (1757 * 7/12)

= 9.93%