Kenneth's Arrows and Bows borrow $15,000 for one year at 8% annual interest. 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

The effective rate of interest will be more than the stated annual interest rate of 8% if the loan is discounted, because the borrowers are receiving less than the face value of the loan. The exact effective rate will depend on the discount rate applied. Since the choices given do not include any rates above 11%, we know the effective rate must be less than that. In order for the effective rate to be more than 9.5%, the discount rate would have to be more than 1.5%, which seems unlikely. Therefore, the best choice is B, which is a reasonable estimate based on the given range of rates.

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