Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2014. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2016.
-What effective interest rate will Island use for the restructured note?

Question

Quizplus · Accepted Answer

Final payment $128,000/note book value $108,000 = (1 + r)² = 1.185185 r = 8.9%

Island Corporation Owes Mutual Bank a 10% Note Payable for $100,000