On September 1, 2009, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan is:

Question

Quizplus · Accepted Answer

To find the effective interest rate, we need to calculate the discount on the note which is the interest charged by the bank. The discount can be calculated as:
Discount = Principal x Discount Rate x Time
Discount = $100,000 x 9% x 8/12
Discount = $6,000

So, the proceeds from the loan will be:
Proceeds = Principal - Discount
Proceeds = $100,000 - $6,000
Proceeds = $94,000

Now, we can calculate the effective interest rate using the following formula:

Effective Interest Rate = (Interest Expense / Proceeds) x (12 / Time)

Interest Expense = Discount
Time = 8/12

Effective Interest Rate = ($6,000 / $94,000) x (12 / 8/12)
Effective Interest Rate = 9.57%

On September 1, 2009, Hiker Shoes Issued a $100,000, 8-Month