A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year.What is the effective rate of interest on this loan if the interest is paid in advance?
A) 9.4 percent
B) 4.7 percent
C) 9.9 percent
D) 10.3 percent

Question

Quizplus · Accepted Answer

To find the effective rate of interest, we need to use the formula:

Effective rate of interest = (Interest/Principal) * (365/Time period)

where,

Interest = $25,000 * 9% = $2,250 (interest paid in advance)
Principal = $25,000
Time period = 180 days or 0.5 year

Substituting these values in the formula, we get:

Effective rate of interest = ($2,250/$25,000) * (365/180) = 0.094 or 9.4%

Therefore, the effective rate of interest on this loan is 9.4 percent, which is closest to option A (9.4 percent).

A Firm Has a Line of Credit and Borrows $25,000