Question

Determine the equivalent simple interest rate for the given bank discount rate.

A: 7% bank discount rate for a six-month loan. (7.25%)

B: 4% bank discount rate for a 2-year loan. (4.35%)

Answer 1

A : 7% discount rate

which implies that for every 100 taken as loan, bank will deduct = 100 x 7% = 7 interest in advance and will give net loan = 93

Here, loan is of 6 months, so interest for 6 months = 100 x 7% x 6/12 = 3.5, so net loan = 100 - 3.5 =96.5

so simple interest rate for 6 months = 3.5/96.5 = 3.62694%

so yearly simple interest rate = 3.62694% x 2 = 7.25388 % = 7.25% [Answer : 7.25%]

B : 4% discount rate, 2 years loan

so 2 years interest = 100 x 4% x 2 = 8

so net loan amount = 100 -8 = 92

so simple interest rate for 2 years = 8/92 = 8.69565%

so yearly simple interest rate = 8.69565%/2 = 4.3478% = 4.35% [Answer : 4.35%]

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