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Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

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BuyFindarrow_forward

Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

Boz Foster signed a $10.000 simple discount promissory note at a bank discount rate of 6%. If the term of the note was 125 days, what was the effective interest rate of the note? Round your answer to the nearest hundredth of a percent.

To determine

To calculate: The amount of bank interest, purchase price and effective rate of interest of the simple discount promissory note purchased by Boz Foster which has face value of $10,000 with discount rate is 6% and for duration of 125 days.

Explanation

Given Information:

Face value is $10,000, interest rate is 6%, time period is 125 days.

Formula used:

Evaluate the time for ordinary interest as,

Time=Number of days of a loan360

The formula to calculate effective rate of interest is,

Effective interest rate=InterestPurchase Price×Time

The formula to compute the amount of bank interest is,

Bank Discount=Face value×Discount Rate×Time

The formula to calculate purchase price is,

Purchase Price=Face valueDiscount

Calculation:

Consider that face value of loan is $10,000, interest rate is 6% and time period is 125 days.

Compute the interest amount,

Simplify the interest rate as,

6%=6100=0.06

Evaluate the time for ordinary interest as,

Time=Number of days of a loan360=125360

Substitute $10,000 for face value, 0.06 for interest rate and 125360 for time in the formula

Bank Discount=Face value×Discount Rate×Time.

Bank Discount=Face value×Discount Rate×Time=10,000×0.06×125360=$208.33

Hence, amount of interest is $208

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