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25. Calculating Interest Rate. 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" .10 à? $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.

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Computation shown with formulas.

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This problem can be modeled as a problem of time value of money. From the borrower's perspective - he borrows 9,000 and repays 10,000 at the end of 1 year.
Using ...

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