What is the effective interest rate of a simple discount note for $7,000 at a bank discount rate of 6%, for 3 months? (Round to the nearest tenth percent)
A) 6.1%
B) 5.8%
C) 6.5%
D) 7.2%

Question

Quizplus · Accepted Answer

The effective interest rate of a simple discount note can be calculated using the formula: Effective Rate = (Discount / Proceeds) * (360 / Time). The discount is calculated as Principal * Rate * Time. For a $7,000 note at a 6% discount rate for 3 months (or 90 days), the discount is $7,000 * 6% * (90/360) = $105. The proceeds are the principal minus the discount, so $7,000 - $105 = $6,895. Therefore, the effective rate is ($105 / $6,895) * (360 / 90) = 6.1%.

What Is the Effective Interest Rate of a Simple Discount