Question

You applied for a one-year loan of $7000 from a bank that lends money at a discount rate of 6%.

(a) Calculate the amount of discount and the proceeds.
(b) Find the rate of interest that is equivalent to a discount rate of 6%.
(c) If you were to borrow the loan from a bank in Europe, what rate of interest would be equivalent to the Canadian rate in part (b) of this question?

Answer 1

(a) Calculate the amount of discount and the proceeds.

Amount of discount = Loan Amount * (1 - 1 / (1+Interest Rate))

Amount of discount = 7000 * (1 - 1 / 1.06)

Amount of discount = $396.23

Proceeds = Loan Amount - Discount

Proceeds = $7000 - 396.23

Proceeds = $6603.77

(b) Find the rate of interest that is equivalent to a discount rate of 6%.

Rate of interest equivalent = Interest rate / (1 - Interest rate) = 0.06 / 0.94 = 6.38%

(c) If you were to borrow the loan from a bank in Europe, what rate of interest would be equivalent to the Canadian rate in part (b) of this question?

if you were to borrow from Europe then the equivalent rate of interest is 6.38% (Equivalency Rate)

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