Kate Davidson signed a simple discount note for $9,000. The discount rate is 5%, and the term of the note is 18 months. What is the effective interest rate? (Round to the nearest tenth percent)
A) 5.4%
B) 6.2%
C) 4.9%
D) 3.8%

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by first finding the discount amount, then dividing it by the proceeds (the amount received after the discount), and finally annualizing it. The discount amount is $9,000 * 5% * 1.5 (18 months = 1.5 years) = $675. The proceeds are $9,000 - $675 = $8,325. The interest rate for the term is $675 / $8,325 = 0.0811 or 8.11%. To find the annual rate, we divide by the term in years: 8.11% / 1.5 = 5.4%.

Kate Davidson Signed a Simple Discount Note for $9,000