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3 October, 12:43

On September 1, 2021, Hiker Shoes issued a $106,000, 6-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 11%. Hiker's effective interest rate on this loan (rounded) is:

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  1. 3 October, 13:42
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    Effective interest rate = [ (Interest value of loan / Amount of loan after payment of interest) * (Number of months annually / Number of months notes hold) ] * 100

    = [ ($5,830 / $100,170) * (12 / 6) ] * 100

    = 0.1164 * 100

    = 11.64%

    1.

    Computation the interest value of loan is:

    Interest value of loan = Amount of loan * 8 / 12 * Percentage of discount

    = ($106,000 * 6 / 12) * 0.11

    = $5,830

    2.

    Amount of loan after payment of interest = Amount of loan - Interest value of loan

    = $106,000 - $5,830

    = $100,170
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