Share
Explore BrainMass

# Interest Rates

Problem 25. (Section one) 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 × \$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?

#### Solution Preview

a. Effective Annual Interest Rate = 1,000/9,000 = .111 or 11.1%

b.
The effective annual interest rate can be calculated as ...

#### Solution Summary

The solution answers the question below and goes into quite a bit of detail regarding interest rates. The answer is ideal for students looking for a detailed analysis of the question asked below. An excellent response to the question being asked.

\$2.19