Question

On July 1, 2020 Trolley & Train World borrowed money from First Friendly National Bank by issuing a $25,000, 90 day, non-interest bearing note. The note was discounted to 14%.

Required:
Compute the following: Use 360-days in a year.

1. How much money did Trolley and Train World receive?
$

2. What was the total amount of interest paid?
$

3. What is the effective 90 day interest rate on this note? Round percentage to two decimals.
%

4. What is the approximate annual effective interest rate on this note payable? Round your intermediate calculation to four decimal places and your final answer to two decimal places.
%

Answer 1

1. Amount received by Trolleey and Train = Bearing Note price - Discount rate

= $25,000 - ($25,000*14%*90/360)

= $25,000 - $875

= $24,125

2.Total Amount of Interest paid = Note price*Discount rate *90/360

=$25,000*14%*90/360

=$875

3.Effective 90 Day interest on Note = Total Interest / Amount received

=$875/$24,125

=0.0262694 0r 0.363%

4.Appropriate annual effective interest rate = Effective 90 day interest rate *360/90

= 0.363*360/90

= 0.1452 or 14.52%