What is the effective interest rate of a simple discount note for $2,700 at a bank discount rate of 12.25%, for 36 months? (Round to the nearest tenth percent)
A) 19.0%
B) 22.0%
C) 19.4%
D) 14.1%

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated using the formula for the effective rate of a simple discount note: $ \text{Effective Rate} = \left( \frac{\text{Discount Rate}}{1 - \text{Discount Rate} \times \frac{\text{Time}}{360}} \right) $. Given a discount rate of 12.25% (or 0.1225 when converted to a decimal) and a time period of 36 months (which is equivalent to 3 years or 1080 days), the calculation is as follows: $ \text{Effective Rate} = \left( \frac{0.1225}{1 - 0.1225 \times \frac{1080}{360}} \right) = \left( \frac{0.1225}{1 - 0.1225 \times 3} \right) = \left( \frac{0.1225}{1 - 0.3675} \right) = \left( \frac{0.1225}{0.6325} \right) $. This calculation results in an effective rate of approximately 0.1937, or 19.4% when rounded to the nearest tenth percent.

What Is the Effective Interest Rate of a Simple Discount