Question

Wayne Night signed a $10,000 note at Lynn Bank that charges a 7% discount rate. Use ordinary interest. If the loan is for 150 days, find: A. Proceeds B. Effective rate charges by the bank (to the nearest tenth percent).

Answer 1

A. Proceeds: $9,712.33

B. Effective rate: 7.21%

Step-by-step explanation:

Loan value: $10,000

Discount rate: 7% per annual

Tenor: 150 days

In ordinary interest, interest is the discount from the loan

= $10,000*7%* 150/365 = $287.67

Proceeds from loan = $10,000 - $287.67 = $9,712.33

Effective rate = interest charged/ proceeds * 365/ tenor

= 287.67 / 9,712.33 *365/150

= 7.21%

Answer 2

A) Proceeds equal $9,300 ($10,000 x (100-7)%)

B) Effective Rate Charges will be 17% (7 x 365/150).

Step-by-step explanation:

The proceeds is the discounted value on the note. This takes away the interest charged on it as given in the answer above.

The effective rate charges is the annualized rate. The note was discounted at 7% for 150 days. Effectively, the real rate per annum is normalized for 365 days.

Please note that the above answers apply because the question requires the use of ordinary interest and not compound interest as ordinarily applies in real life.