Question

Justin discounts a 115-day note for $26,000 at 8.5%. the effective rate of interest to the nearest tenth percent is:

Answer 1

8.7%

$26,000 x .085 x 115/360 = $705.97
$26,000 - $705.97 = $25,294.03
$25,294.03 x 115/360 = $8080.04
$705.97/$8080.04 = 8.7%

Answer 2

Answer:

8.74%

Explanation:

Interest = Principal x Interest Rate = $26,000 x .085 x 115/360 = $705.97

EAR = Interest/[(Principal - Interest) x (115/360)]

= $705.97/[($26,000 - $705.97) × (115/360)] = $705.97/ $8,080.04 = 0.0874, or 8.74%