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HDlamini Traders borrows R100 000 from ABC Bank. The prime rate at the date the loan is negotiated is 10%. The loan involves a 120-day note with interest payable at the end of the 120 days. Interest is set at a floating rate of 2% above prime. After 60 days the prime rate decreases to 9%. Assume a 360 day financial year.
3. The effective interest rate for the 120 days note is equal to …4.Caculate the effective annual rate of the 120 day-note rooled over each 120 day for the year under the same terms and circumstances is closet to
What you need to do is calculate the interest over the 120 days – work out the interest on the R100,000 and then express it as an interest rate (which is what is wanted in ‘3’)
Then to turn it into an effective annual rate (for ‘4’) you need to take the interest rate you have calculated for the 120 days (‘r’) and then use the equation:
1 + R = (1+r)^(360/120)
(where R is the annual effective rate)
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