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Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?

Short Answer

Expert verified

The effective interest rate is 14.94%.

Step by step solution

01

Information provided in the question

Amount of loan = $5,000

Loan term = 1 year

Cost of loan = 13%

02

Calculation of interest payable

The interest payable on the loan is $650.

Interestpayable=Interestrate×Principal=13%×$5,000=$650

03

Calculation of effective interest rate when the loan is discounted

The effective interest rate is 14.94%.

Effectiverate=InterestPrincipal-Interest×DaysinyearDaysloaninoutstanding=$650$5,000-$650×360360=14.94%

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