A sum of $10000 is borrowed for 5 years. If the Banker's Discount is $2500, what

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Question: A sum of $10000 is borrowed for 5 years. If the Banker\'s Discount is $2500, what is the effective interest rate?

Options:

Correct Answer: 8%

Solution:

Effective Interest Rate = (Banker\'s Discount / Principal) × 100 = (2500 / 10000) × 100 = 25%.

A sum of $10000 is borrowed for 5 years. If the Banker's Discount is $2500, what is the effective interest rate?

A sum of $10000 is borrowed for 5 years. If the Banker's Discount is $2500, what is the effective interest rate?

Step 1: Identify the total amount borrowed, which is the Principal. In this case, it is $10000.
Step 2: Identify the Banker's Discount, which is given as $2500.
Step 3: Use the formula for Effective Interest Rate: Effective Interest Rate = (Banker's Discount / Principal) × 100.
Step 4: Substitute the values into the formula: Effective Interest Rate = (2500 / 10000) × 100.
Step 5: Calculate the fraction: 2500 divided by 10000 equals 0.25.
Step 6: Multiply 0.25 by 100 to convert it to a percentage: 0.25 × 100 = 25%.
Step 7: Conclude that the effective interest rate is 25%.

Banker's Discount – The difference between the maturity value of a loan and the amount borrowed, calculated based on the nominal interest rate.
Effective Interest Rate – The actual interest rate that is paid on a loan, taking into account the Banker's Discount and the principal amount.
Principal Amount – The original sum of money borrowed or invested, before any interest is added.