Question

7. A man makes a simple discount note for $6,200, at an ordinary bank discount rate of 8.84%, for 40 days. What is the effective interest rate? Round to the nearest tenth of a percent. (Use the bankerâs rule.)

Answer 1

Answer:

The effective interest rate, rounded to the nearest tenth, is 0.1%.

Step-by-step explanation:

The banker's rule is the simple interest formula.

The simple interest formula is given by:

$E = P*I*t$

In which E are the earnings, P is the principal(the initial amount of money), I is the interest rate(yearly) and t is the time, in years.

The effective interest rate is given by the following formula:

$E_{IR} = \frac{E}{P}$.

In this problem, we have that:

A man makes a simple discount note for $6,200, at an ordinary bank discount rate of 8.84%, for 40 days. We consider that the year has 360 days. This means that $P = 6200, I = 0.0884, t = \frac{40}{360} = \frac{1}{9}$.

So

$E = 6200*0.0884*\frac{1}{9} = 60.9$

The effective interest rate is

$E_{IR} = \frac{E}{P} = \frac{60.9}{6200} = 0.0098 = 0.001$

The effective interest rate, rounded to the nearest tenth, is 0.1%.