Question

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 %

Answer 1

Answer:

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%