Question

Phu takes out a $2,400 discounted loan using a simple interest rate of 8% for a period of 18 months. What is the effective interest rate, re

Answer 1

9.1

Explanation:

To calculate the total interest payable, we use the formula

I=P0rt,

and substituting our values yields

I=$2,400×0.08×1812=$288.

Therefore the total amount he receives at loan drawdown is $2,400−$288=$2,112. To calculate the effective interest rate, we use to formula

A=P0(1+ret).

In this instance we have A=$2,400,P0=$2,112 (redefined from the value above) and t=1.5. We substitute into the formula to get

$2,400=$2,112(1+1.5re).

Solve for re.

24002112=1+1.5re

24002112−1=1.5re

24002112−11.5=re

This gives re=0.0909⋯=9.0909…%, which is 9.1%