Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 14QTD
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Question
Calulate the effective interest rate.
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Expert Solution
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Step 1
Here,
Value of Note is $29,059
Simple Interest Rate is 8%
Time Duration of Note is 12 months
Step 2 a) Calculation of Effective Interest Rate:
The effective interest rate of a simple interest note will remain 8 % only as the value of the note will remain the same.
In order to calculate the effective Interest rate, we need to calculate the value of simple discount note which is as follows:
Calculation of Interest on Note is as follows:
Calculation of Value of Simple Discount Note is as follows:
Calculation of Effective Interest Rate is as follows:
Answer: Effective Interest Rate is 8.70%
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