(d) The requirement is to calculate the effective interest
rate when a loan is in the form of a discounted note. When a note
is on a discounted basis, the interest is withheld from the proceeds.
Answer (d) is correct because the effective interest rate is
calculated by dividing the total amount of interest by the amount
of funds available. In this case, the interest is equal to $9,000
($100,000 × 9%) and the funds available are $91,000 ($100,000
– $9,000). Thus the interest rate is 9.89% ($9,000/$91,000).
Answer (b) is incorrect because it represents the stated rate, not
the effective rate.