Question

On October 31, 2019, Simeon Builders borrowed $1,200,000 cash from Star Finance Co. by issuing a $1,250,000, 6-month, non-interest-bearing note. Simeon Builders' effective annual interest rate on this loan is:

Answer 1

Answer:

8.4%

Explanation:

To find the effective annual interest rate, we must first find the total amount of interest paid, and this amount is equal to the repaid amount minus the borrowed amount:

Interest paid = $1,250,000 - $1,200,000

                     = $50,000

To find the interest rate, we divided the interest paid by the borrowed amount:

Interest rate = $50,000 / $1,200,000

                    = 0.042

                    = 4.2%

Finally, we multiply this number by 2 to obtain the effective annual interest rate:

Effective Annual Interest Rate = 4.2% x 2

                                                  = 8.4%