Question

On September 1, 2021, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9% Hiker's effective interest rate on this loan (rounded) is: (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A. 9.0%.
B. 9.5%
C. 9.6%.
D. 9.7%

Answer 1

C. 9.6%.

Step-by-step explanation:

Our first task in this would be to determine the amount at which the note was issued using the discount rate

PV=FV-(FV*discount rate*8/12)

PV=$100,000-($100,000*9%*8/12)

PV=$94,000

interest rate=($100,000-$94,000)/$94,000

interest rate=6.38%(for 8 months)

Effective interest rate=6.38%/8*12

effective interest rate=9.6%