Discount loan. Up-Front Bank uses discount loans for all its customers who want one-year loans. Currently, the bank is providing one-year discount loans at 7.8%.
What is the effective annual rate on these loans? If you were required to repay $250,000 at the end of the loan for one year, how much would the bank have given you at the start of the loan?
Homework Answers
Effective Rate on Loan = 7.8/(100 - 7.8)
Effective Rate on Loan = 8.46%
Loan Amount = 250,000(1 - 0.078) = $230,500
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