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.
Answer (A) is incorrect because The lesser amount of funds available on a discounted note means the effective rate will be higher than the contract rate.
Answer (B) is incorrect because The nominal rate (discount rate) is 9.00%.
Answer (C) is incorrect because The nominal rate multiplied by 9% equals 9.81%.
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