If you sign a discount note for $7,500 at a bank discount rate of 5% for 3 months, what is the effective interest rate? Round to the nearest tenth percent.
If you sign a discount note for $7,500 at a bank discount rate of 5% for 3 months, what is the effective interest rate? Round to the nearest tenth percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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If you sign a discount note for $7,500 at a bank discount rate of 5% for 3 months, what is the effective interest rate? Round to the nearest tenth percent.
Step 1
The effective interest rate is the actual interest rate charged on a discounted note and takes into account the fact that the borrower does not receive the full amount of the principal. It is calculated using the bank discount, the proceeds, and time.
The bank discount is calculated as follows where the discount rate is given as a decimal and the time will be a fraction whose numerator is the given amount of time in months and denominator is 12 months.
bank discount = face value ✕ discount rate ✕ time
The rate was given to be 5%. As a decimal, we have .
Calculate the bank discount (in $) for the $7,500 promissory note at a discount of 5% for 3 months.
| bank discount | = | face value ✕ discount rate ✕
|
||
| = | $7,500 ✕ ✕
|
|||
| = | $ |
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