On September 1, 2013, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is:

Question

Quizplus · Accepted Answer

To find the effective interest rate, we need to use the formula:

Effective interest rate = (Interest expense / Amount of loan) x (12 / Number of months)

First, we need to calculate the interest expense. Since the loan is noninterest-bearing, the interest expense is the discount that the bank accounts for when it lends the money.

Discount = Face value x Discount rate x Time

Discount = $100,000 x 9% x 8/12

Discount = $6,000

The interest expense is then:

Interest expense = Face value - Proceeds = $100,000 - $6,000 = $94,000

Now, we can calculate the effective interest rate:

Effective interest rate = ($6,000 / $94,000) x (12 / 8)

Effective interest rate = 0.0638 x 1.5

Effective interest rate = 0.0957 or 9.6% (rounded)

On September 1, 2013, Hiker Shoes Issued a $100,000, 8-Month