Final answer:
The discount rate used by the bank is calculated by the formula for bank discount yield, leading to a discount rate of 10%. This is discovered by dividing the discount amount ($1,250) by the product of the principal amount ($50,000) and the fraction of the year represented by the days to maturity over 360. The correct answer is option c. 10.00%.
Step-by-step explanation:
To answer the student's question regarding the discount rate used by the bank, we need to calculate the discount amount and relate that to the principal amount of the note. In this case, a $50,000 note is discounted to provide proceeds of $48,750; therefore, the discount amount is the difference between the two, which is $1,250.
To find the discount rate (r), we use the formula for the bank discount yield, which is Discount / (Principal × (Days to maturity/360)). Plugging in the known values:
Discount = $1,250
Principal = $50,000
Days to maturity = 90
We calculate the discount rate:
$1,250 / ($50,000 × (90/360)) = $1,250 / ($50,000 × 0.25) = $1,250 / $12,500 = 0.10 or 10%
Thus, the correct discount rate used by the bank is option c. 10.00%.