If you sign a discount note for 4200 at a bank discount rate

If you sign a discount note for $4,200 at a bank discount rate of 9%, for 90 days, what is the effective interest rate? (Round to the nearest tenth percent

Solution

I = PRT; I = $4,200(0.09)(90/360)

I = $94.5 (Bank discount)

Proceeds = $4,200 - $94.5 = $4,105.5

R = I/PT;

R = $94.5 /($4,105.5)(90/360)

R = 0.0920716

R or the effective interest rate = 9.21%