Question

show your all step by step. 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 the america., what rate of interest would be

equivalent to the Canadian rate in part (b) of this question?

Answer 1

Here the given informations are:

Loan=Face Value=7000$

Discount rate= 6%

Time period= 1 year=12 months

(a) Formula to find the amount of discount:

Here Bank discount is considered as Interest

I = PRT

here, P= 7000, R=6/100=0.06, T=12/12=1

I= 7000*0.06*1

I= 420 $

So, the amount of discount = 420 $

Proceeds= Loan- Discount

Proceeds= 7000-420

Proceeds= 6580$

(b) Equivalent rate of interest

Formula is R= I/(PT)

Here I= 420, P= 6580, T=1

R= 420/(6580*1)

R= 6.38%

So, the rate of interest that is equivalent to discount rate of 6%= 6.38%

(c) If we convert CAD to USD ,

I= 318.55, P= 4990.60, T=1

R= 318.55/(4990.6*1)

R= 6.38%

The interest rate would remain the same.