If you sign a discount note for $4,200 at a bank discount rate of 9%, for 90 days, what is the effective interest rate? (Round to the nearest tenth percent)
A) 9.2%
B) 9.0%
C) 7.3%
D) 8.5%

Question

Quizplus · Accepted Answer

The effective interest rate is calculated by dividing the actual interest paid by the proceeds of the loan, then annualizing it. For a $4,200 note at a 9% discount rate for 90 days, the interest paid is $4,200 * 9% * (90/360) = $94.50. The proceeds of the loan are $4,200 - $94.50 = $4,105.50. The effective interest rate is ($94.50 / $4,105.50) * (360/90) = 9.2%.

If You Sign a Discount Note for $4,200 at a Bank