This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $34,000 for one year. The interest rate is 13.9 percent. You and the lender agree that the interest on the loan will be. 139 * $34,000 = $4,726. So the lender deducts this interest amount from the loan up front and gives you $29,274. In this case, we say that the discount is $4,726. What is the effective interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) Effective interest rate %

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Business

Yadira Fitzgerald

27 June, 05:24

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $34,000 for one year. The interest rate is 13.9 percent. You and the lender agree that the interest on the loan will be. 139 * $34,000 = $4,726. So the lender deducts this interest amount from the loan up front and gives you $29,274. In this case, we say that the discount is $4,726. What is the effective interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) Effective interest rate %

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Answers (1)

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Julio Lyons · Answer 1

The correct answer is 16.14%.

Explanation:

According to the scenario, the given data are as follows:

Future value (FV) = $34,000

Present value (PV) = $29,274

Effective rate of interest (r) = ?

Time period (t) = 1 year

So, we can calculate the Effective rate of interest by using following formula:

FV = PV (1 + r) ^t

By putting the value, we get,

$34,000 = $29,274 (1 + r) ^1

1 + r = $34,000 : $29,274

r = 1.1614 - 1

r = 0.1614 or 16.14%