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Effective Rate of Discounted Loan

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Discount Loan. A discount bank loan has a quoted annual rate of 6 percent.

a) What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?
b) What is the effective rate of interest if the loan is for 1 month?

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The solution explains how to calculate the effective rate of discounted loan

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a) In a discount loan, the interest is paid upfront. Let the amount borrowed is $100. Interest amount for 1 year is 100X6% = $6. The ...

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