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 11% Hiker's effective interest rate on this loan (rounded) is: ____________

Answer 1

Answer: 11.87%

Explanation:

Effective interest rate on this loan is:

= Interest payment / (Note - Interest payment) * 12/8 months

Interest payment:

= Note * Interest rate * 8/12 months

= 100,000 * 11% * 8/12

= $7,333

Effective interest:

= 7,333 / (100,000 - 7,333) * 12/8

= 11.87%