Question

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%.

Answer 1

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 = $\frac{Interest}{Principal} * \frac{No. of days in a year}{No. of days the loan is outstanding}$

Substituting the given values in the above formula, we get

Effective rate of interest = $\frac{60}{1000} * \frac{360}{120}$  = [9/50] = 0.18 or 18%

Thus, the effective rate of interest on the loan will be 18%.

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