Consider a situation where you borrow $40,000.The interest paid is $3,000,and is deducted at the beginning of the period.What is the interest rate?
A)12.11%
B)7.5%
C)8.11%
D)11.5%
E)0

Question

Quizplus · Accepted Answer

To find the interest rate, we need to divide the interest paid ($3,000) by the amount borrowed ($40,000).
$3,000 / $40,000 = 0.075 = 7.5%
However, the interest is deducted at the beginning of the period, which means it is a type of interest known as "discount interest". With discount interest, the interest paid is actually the principal multiplied by the interest rate and the time period. In this case, the interest paid is equal to the principal minus the amount received, which is $40,000 - $37,000 = $3,000.
So, we need to find the interest rate that, when multiplied by the principal ($40,000) and time period, gives us a total interest of $3,000. 
$3,000 = $40,000 x r x 1
r = 0.075 = 7.5%
Therefore, the interest rate is 8.11% (C)

Consider a Situation Where You Borrow $40,000