The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 7% is
A) 6.54%.
B) 7%.
C) 14.29%.
D) 7.53%.

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated using the formula:

Effective interest rate = (Discount / Proceeds) * (360 / n) * 100%

where Discount = Face value * Bank discount rate * Time
Proceeds = Face value - Discount
n = Time period in days

Given, Face value = $300,000, Bank discount rate = 7%, Time period = 12 months = 360 days.

So, Discount = $300,000 * 7% * 1 = $21,000
Proceeds = $300,000 - $21,000 = $279,000

Therefore, Effective interest rate = (21,000 / 279,000) * (360 / 360) * 100% = 7.53%

Hence, the correct answer is Option D.

The Effective Interest on a 12-Month, Zero-Interest-Bearing Note Payable of $300,000