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 $25,000 for one year. The interest rate is 13 percent. You and the lender agree that the interest on the loan will be .13 × $25,000 = $3,250. So the lender deducts this interest amount from the loan up front and gives you $21,750. In this case, we say that the discount is $3,250.

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 13 percent. You and the lender agree that the interest on the loan will be .13 × $25,000 = $3,250. So the lender deducts this interest amount from the loan up front and gives you $21,750. In this case, we say that the discount is $3,250.

Explanation / Answer

I understand you want to calculate Effective interest rate:

Effective interest rate = 25000/21750 -1

Effective interest rate = 25000/21750 -1 = 14.94253%

Effective interest rate = 14.94%

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Note:

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