If $5,000 is borrowed on a discount basis and the rate is 10 percent, the annual percentage interest rate on this loan would be:

Question

Quizplus · Accepted Answer

On a discount basis, the interest is deducted from the borrowed amount upfront. So, the actual amount received by the borrower is:

$5,000 - ($5,000 x 10%)
= $5,000 - $500
= $4,500

The interest paid over the year would be $500, and it is calculated on the amount received, which is $4,500. So, the annual percentage interest rate can be calculated as:

($500/$4,500) x 100%
= 11.11% (rounded to one decimal place)
= 11.1% (rounded to the nearest tenth)

Thus, the best answer is D) 11.1%.

If $5,000 Is Borrowed on a Discount Basis and the Rate