Tina Mier must pay a $5,000 furniture bill. A finance company will loan Tina $5,

Question

Tina Mier must pay a $5,000 furniture bill. A finance company will loan Tina $5,000 for 8 months at a 9.21% discount rate. The finance company told Tina that if she wants to receive exactly $5,000, she must borrow more than $5,000. The finance company gave Tina the following formula: What to ask for = Amount of cash to be received 1 (Discount rate ×Time of loan) a. Calculate Tina’s loan request. (Do not round intermediate calculations. Round your final answer to the nearest cent.) Loan request $ b. Calculate the effective rate of interest. (Do not round intermediate calculations. Round your final answer to the nearest hundredth percent.) Effective rate of interest %

Explanation / Answer

Amount of cash to be received = Loan Amount*(1 (Discount rate ×Time of loan))

Since Tina wants to receive $5,000, she needs to brrow the loan amount that will be give $5,000 as the final received amount.

5000 = Loan Amount*(1 - (0.0921*8/12))

Loan Amount = 5000/.09386 = $5,327

The effective interest rate = (5327 - 5000)/5000 = 6.54%

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