A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one year. The stated interest rate is ________ and the effective interest rate is ________.
A) 12.00%; 12.00%
B) 13.64%; 12.00%
C) 12.00%; 13.64%
D) 12.00%; 10.71%

Question

Quizplus · Accepted Answer

The stated interest rate is 12%, as stated in the problem. However, because it is a discount loan, the interest is deducted from the amount borrowed upfront, so the effective amount borrowed is only $88,000 ($100,000 - $12,000 in interest). Therefore, the effective interest rate is calculated as:
Effective Interest Rate = (Interest Paid / Effective Amount Borrowed) x 100%
Effective Interest Rate = ($12,000 / $88,000) x 100% = 13.64% (rounded to two decimal places)
Therefore, the best answer is C, where the stated interest rate is correctly stated as 12% and the effective interest rate is correctly calculated as 13.64%.

A Firm Arranges a Discount Loan at a 12 Percent