Question

On September 1, 2021, Hiker Shoes issued a $108,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 10%. Hiker's effective interest rate on this loan (rounded) is: (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Answer:

effective interest rate = 4.75 %

Explanation:

given data

principal = $108,000

time = 8 months = $\frac{8}{12}$ year

rate = 10%

solution

we get here first interest that is

interest = principal × rate × time .................1

put here value

interest = $108,000  × 10% × $\frac{8}{12}$

interest = $7200

so here effective interest rate will be here as

effective interest rate = $\frac{interest}{principal- interest}$ × time  ...........2

put here value

effective interest rate = $\frac{7200}{108000-7200}$  ×  $\frac{8}{12}$

effective interest rate = 0.04761

effective interest rate = 4.75 %