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Effective Interest Rate on a Discount Interest Loan

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In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $16,000 and the interest rate is 10.75%, the borrower "pays" .1075 Ã- $16,000 = $1,720 immediately, thereby receiving net funds of $14,280 and repaying $16,000 in a year.

a. What is the effective interest rate on this loan? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Effective interest rate = %______________

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This solution illustrates how to compute the effective interest rate on a discount interest loan.

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