A man has a simple discount note for 6,500, at an ordinary bank discount rate of 8.53%, for 60 days. What is the effective interest rate?
There are different methods used to calculate " effective annual rate" on discounted notes in many countries. In the USA, the "EAR" is calculated as follows:
EAR =[1 +(quoted rate/n) ]^n - 1, where "quoted rate" =8.53%, n =365/60.
EAR =[1 + (0.0853/(365/60)) ]^(365/60) - 1
EAR =[1 + 1.01402192]^6.0833 - 1
EAR = 1.0884 - 1 x 100
EAR = 8.84% Effective annual rate.
