Rochelle needed to borrow $3,000 for three months in order

Rochelle needed to borrow $3,000 for three months in order to pay for college expenses while waiting for her scholarship to arrive. After Rochelle filled out the loan application, the loan officer at the bank asked her if she would like to pay the interest up front or at the maturity of the note. He went on to explain that it didn’t make a difference, but he preferred that she pay it up front because it would make his paperwork easier. He also told Rochelle that the interest rate and amount would be the same. Rochelle agreed, signed the three-month, 12%, discounted note and left with a check for $2,910.

1. Did the loan officer offer Rochelle an acceptable explanation of the interest rate? Justify your answer.

2. What is the effective rate of interest on Rochelle’s loan? Round to the nearest tenth of a percent.

3. In a short paragraph, explain the difference between an “interest-bearing” note and a “discounted” note.

4. In groups of two or three, discuss some common situations where the average person might misunderstand interest rate quotations.

Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...


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