If a bank offers a firm a simple interest loan of $1000 for 120 days at a cost of $60 interest, the effective rate of interest on the loan will be 20%.
Answers
If a bank gives a S.I. loan of $1000 for 120 days at a cost of $60 interest, then the effective rate of interest on the loan will be 18%.
Explanation:
Principal = $ 1000
No. of days the loan is outstanding = 120 days
Amount of the interest = $ 60
We know the formula for the effective rate of interest on a loan with a term of less than a year is given by,
Effective rate =
Substituting the given values in the above formula, we get
Effective rate of interest = = [9/50] = 0.18 or 18%
Thus, the effective rate of interest on the loan will be 18%.
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