Question

Mark Price, the owner of Biggie's Restaurant, took a simple discount note for two years from PNC Bank for renovations. His loan was for $10,000 at a 6% discount rate. Calculate (A) bank discount, (B) proceeds, (C) effective rate to the nearest tenth.

Answer 1

a. Bank discount = Loan Amount * Discount rate * No. of Years

Bank discount = $10,000 * 6% * 2 years

Bank discount = $ 10,000*0.06*2

Bank discount = $1,200

b. Proceeds = Loan Amount - Bank Discount

Proceeds = $10,000 - $1,200

Proceeds = $8,800

c. Discount rate = 6% Monthly Discount rate = 6% / 12 = 0.5%

Effective rate = [( 1 + Discount rate in percentage/n ) ^ n ] - 1

Effective rate = [ ( 1 + 0.6%/ 12) ^ 12 ] - 1

Effective rate = [ ( 1+ 0.06/12)^12 ] - 1

Effective rate = 1.005^12 - 1

Effective rate = 1.061677 - 1

Effective rate = 0.061677

Effective rate = 6.17%