posted by Bryan on .
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 percent, the borrower “pays” 0.10 x $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?
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. Why is the effective annual rate always greater than the stated rate d?
Please note that we don't do students' homework for them. Be sure to go back into your textbook or use a good search engine. http://hanlib.sou.edu/searchtools/
Once YOU have come up with attempted answers to YOUR questions, please re-post and let us know what you think. Then someone here will be happy to comment on your thinking.