Julius Juices borrows $34,000 by giving the bank its own 8%, 120-day note. The bank discounts the interest. The effective interest rate is: (Use a 360-day year. Do not round any intermediate calculations. Round your final answer two decimal places, X.XX%.)
A) 8.00%.
B) 8.22%.
C) 7.79%.
D) 8.44%.

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by first determining the interest amount using the formula: Interest = Principal × Rate × Time. Here, Principal = $34,000, Rate = 8% (or 0.08), and Time = 120/360 (since a 360-day year is used). So, Interest = $34,000 × 0.08 × (120/360) = $907.20. The bank discounts the interest, meaning it deducts the interest from the principal upfront, so the amount received is $34,000 - $907.20 = $33,092.80. The effective interest rate is then calculated by dividing the interest by the amount received and then annualizing it: ($907.20 / $33,092.80) × (360/120) = 0.0822 or 8.22%.

Julius Juices Borrows $34,000 by Giving the Bank Its Own