In a discount interest loan, you pay the interest payment up front. For example, if a...

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In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $50,000 and the interest rate is 7.50%, the borrower “pays” 0.0750 × $50,000 = $3,750 immediately, thereby receiving net funds of $46,250 and repaying $50,000 in a year.

a. What is the effective interest rate on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 17.50%?

LIRCR my work In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as

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Answer 1

Answer #1

a.

Effective Interest Rate = 3,750/46,250 = 8.11%

b.

Interest Amount = 0.1750(50,000) = $8,750

Effective Rate = 8,750/(50,000 - 8,750) = 21.21%

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Answer 2

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