Smyth Company borrows $5,000 by giving the bank its own 8%,90-day note.The bank discounts the interest.The effective interest rate is
A)7)84%.
B)8)00%.
C)8)16%.
D)8)84%.

Question

Quizplus · Accepted Answer

To find the effective interest rate, we need to use the following formula:
Effective interest rate = (interest paid / amount borrowed) x (360 / days loan is outstanding)

The interest paid is 8% of $5,000, which is $400. The amount borrowed is $5,000. The loan is outstanding for 90 days. The bank discounts the interest, so Smyth Company only receives $4,600 ($5,000 - $400).

Plugging in these values to the formula:
Effective interest rate = (400 / 4,600) x (360 / 90) = 0.087 or 8.16%

Therefore, the answer is C) 8.16%.

Smyth Company Borrows $5,000 by Giving the Bank Its Own