This question illustrates what is known as discount interest . Imagine you are d

Question

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $26,000 for one year. The interest rate is 13.1 percent. You and the lender agree that the interest on the loan will be .131

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $26,000 for one year. The interest rate is 13.1 percent. You and the lender agree that the interest on the loan will be .131

Explanation / Answer

Discount = $3406

Amount received = $22594

Therefore, Effective Interest rate = $3406/22594*100

= 15.0748%

Note :-

We have assumed that interest rate is compounded annually.

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