Elan Corporation is considering borrowing $100,000 from a bank for 1 year at a stated interest rate of 9%. What is the effective interest rate to Elan... Accounting MCQs | Accounting MCQs

Elan Corporation is considering borrowing $100,000 from a bank for 1 year at a stated interest rate of 9%. What is the effective interest rate to Elan if this borrowing is in the form of a discounted note?

8.10%
9.00%
9.81%
9.89%Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (D) is correct. The effective interest rate on a discounted loan can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Stated rate) = 9% ÷ (100% – 9 = 9% ÷ 91% = 9.89 Note that the amount of the loan is not needed to calculate the effective rate.