In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $10,000 and the interest rate is 10%, the borrower "pays" .10 × $10,000 = $1,000 immediately, thereby receiving net funds of $9,000 and repaying $10,000 in a year. a. What is the effective interest rate on this loan? (Round your answer to 2 decimal places.) b. If you call the discount d (for example, d = 10% using our numbers), express the effective annual rate on the loan as a function of d. c. Is the effective annual rate always greater than the stated rate d?
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $10,000 and the interest rate is 10%, the borrower "pays" .10 × $10,000 = $1,000 immediately, thereby receiving net funds of $9,000 and repaying $10,000 in a year. a. What is the effective interest rate on this loan? (Round your answer to 2 decimal places.) b. If you call the discount d (for example, d = 10% using our numbers), express the effective annual rate on the loan as a function of d. c. Is the effective annual rate always greater than the stated rate d?
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 14P
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14.
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $10,000 and the interest rate is 10%, the borrower "pays" .10 × $10,000 = $1,000 immediately, thereby receiving net funds of $9,000 and repaying $10,000 in a year.
a. What is the effective interest rate on this loan? (Round your answer to 2 decimal places.)
b. If you call the discount d (for example, d = 10% using our numbers), express the effective annual rate on the loan as a function of d.
c. Is the effective annual rate always greater than the stated rate d?
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