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3 May, 18:57

In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $20,000 and the interest rate is 10%, the borrower "pays" 0.10 * $20,000 = $2,000 immediately, thereby receiving net funds of $18,000 (=$20,000-$2,000) and repaying $20,000 in a year. "What is the implied rate on this loan?"a. 10%b. 9.5%c. 11.1%d. 20%

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  1. 3 May, 21:30
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    c. 11.1%

    Explanation:

    The formula to compute the implied rate is shown below:

    Future Value = Present Value * (1 + Interest rate)

    $20,000 = $18,000 * (1 + Interest rate)

    $20,000 = $18,000 * (1 + Interest rate)

    So, (1 + Interest rate) = 1.1111

    So, the interest rate is

    = 1.1111 - 1

    = 0.1111 or 11.1%

    We simply applied the above formula to determine the implied rate on this loan
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