On october 31, 2009, sky co. borrowed $16 million cash and issued a 7-month, noninterest-bearing note. the loan was made by star finance co. whose stated discount rate is 8%. sky's effective interest rate on this loan is:

Sky's effective interest rate on this loan is 8.39%.

In this question, we assume that interest is compounded annually.

Since Sky issues a non-interest bearing note, Star Finance will deduct 7 months' interest at 8% on the Face Value of the loan and pay the rest as principal to Sky.

Face value of the note            $16 million

Discount Rate p.a                        8%  

Tenure of the note                    7 months

So, Sky pays an interest of 0.746666667 on a sum of 15.25333333  for 7 months. This works out to a seven month interest of:

From this we can work out the effective interest rate for Sky as follows:

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