**Understanding Effective Interest Rates for Simple Discount Notes**This section will help you understand how to calculate the effective interest rate of a simple discount note. Let's look at a specific example.**Problem Statement:**What is the effective interest rate of a simple discount note for $31,200, at an ordinary bank discount rate of 14%, for 30 days? Assume that there are 360 days in a year.---**Solution:**1. **Calculate the Bank Discount:** The bank discount is calculated using the formula: \[ \text{Bank Discount} = \text{Face Value} \times \text{Discount Rate} \times \frac{\text{Time}}{360} \] Given: - Face Value (FV) = $31,200 - Discount Rate (DR) = 14% = 0.14 - Time (T) = 30 days \[ \text{Bank Discount} = 31,200 \times 0.14 \times \frac{30}{360} = 31,200 \times 0.14 \times 0.0833 = \$364.32 \]2. **Determine the Proceeds (P):** The proceeds are calculated as the face value minus the bank discount. \[ \text{Proceeds} = \text{Face Value} - \text{Bank Discount} = 31,200 - 364.32 = \$30,835.68 \]3. **Calculate the Effective Interest Rate (EIR):** The effective interest rate on the proceeds can be found using the simple interest formula: \[ \text{Effective Interest Rate} = \frac{\text{Interest (Bank Discount)}}{\text{Proceeds}} \times \frac{360}{\text{Time}} \] Substituting the given values: \[ \text{Effective Interest Rate} = \frac{364.32}{30,835.68} \times \frac{360}{30} = \frac{364.32}{30,835.68} \times 12 = 0.141992 \approx 14.2\% \]Hence, the effective interest rate is approximately **14.2%**.---Feel free to use this example as a guide

Introduction: The effective interest rate is the loan usage rate that a borrower pays. It is also…

What is the effective interest rate of a simple discount note for $31,200, at an ordinary bank discount rate of 14%, for 30 days? Assume that there are 360 days in a ye- The effective interest rate is %. (Round to the nearest tenth as needed.) CITE L

What is the effective interest rate of a simple discount note for $31,200, at an ordinary bank discount rate of 14%, for 30 days? Assume that there are 360 days in a ye- The effective interest rate is %. (Round to the nearest tenth as needed.) CITE L

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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