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

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 $20,000 for one year. The interest rate is 12.5 percent. You and the lender agree that the interest on the loan will be 0.125 × $20,000 = $2,500. So the lender deducts this interest amount from the loan up front and gives you $17,500. In this case, we say that the discount is $2,500. What is the effective interest rate? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Effective interest on loan:

= $2,500÷$17,500

= 14.29%

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