Question

Calculate interest for the time period of October 1 - December 31 (3 months). Interest rate is 8% annual on $50,000 note. On the Cramster solution it said this: Interest = Principal * Rate * Time of Period, which is what I did and got $1000. But it said the answer was $1,000 per month, for a total of $3,000 interest accruing for the period. Is it $1,000 or $3,000?

Answer 1

Answer: Based on the information provided, 8% rate is annual 12 month rate. Hence 12 month interest will be $ 50,000 x 8% = $ 4,000

However, since the interest is to be recognised as 'accrued' for a period of 3 months [from 1 oct to Dec 31), the interest will be calculated as follows:

$ 4,000 [12 month interest] x 3 months/12 months

= 4000 x 3/12
= $ 1,000

Hence, 3 months Interest to be accrued = $ 1,000 [ or$333.33 per month]

So far as the question data is considered, $3000 as interest would be wrong.