Your bank offers discount loans at a discount rate of 7.50%
If you borrowed $50,000 as a discount loan from the bank today at this rate (you receive less than the face value today and repay the face value in one year), how much money would you receive today? What is the EAR of this loan?
What will be an ideal response?
Answer: Loan amount = FV × (1 - discount rate) = $50,000 × (1 - 0.075) = $46,250.
EAR = Interest paid/Net loan amount = $3,750/$46,250 = 8.11%.
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