Question

a firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year. what is the effective rate of interest on this loan if the interest is paid in advance?

Answer 1

The effective rate of interest on the loan is 18%.

Step-by-step explanation:

To calculate the effective rate of interest on a loan with interest paid in advance, we need to consider the time period and the interest rate. In this case, the firm borrowed $25,000 at a 9% interest rate for 180 days or half a year. Since the interest is paid in advance, we can calculate the effective rate by dividing the interest by the principal amount and multiplying by the number of times the interest is compounded. In this case, the interest is compounded once at the beginning of the loan period.

Step 1: Calculate the interest: $25,000 x 9% = $2,250

Step 2: Calculate the effective rate: ($2,250 / $25,000) x 2 = 0.18 or 18%