Kenneth's Arrows and Bows borrows $15,000 for one year at an 8% annual interest rate. What is the effective rate of interest if the loan is discounted?
A) Less than 8.5%
B) More than 8.5% but less than 9.5%
C) More than 9.5% but less than 10.5%
D) More than 10.5%

Question

Quizplus · Accepted Answer

When a loan is discounted, the interest is deducted from the principal at the beginning of the loan period. For a $15,000 loan at 8%, the interest is $15,000 * 0.08 = $1,200. The effective loan amount is $15,000 - $1,200 = $13,800. The effective rate is $1,200 / $13,800 = 0.087, or 8.7%, which is more than 8.5% but less than 9.5%.

Kenneth's Arrows and Bows Borrows $15,000 for One Year at an 8