You just received a loan from your banker to buy seed and plant your alfalfa field. The loan is a discount loan and is for $5,000 for 1 year and the quoted rate was 10%. What is your APR?

Question

Quizplus · Accepted Answer

A discount loan is one where the interest is deducted from the principal upfront and the borrower receives the net amount. In this case, the borrower receives $5,000 and pays back $5,500 at the end of the year. 
To calculate the APR, we need to find the interest rate that would make the present value of the loan equal to $5,000. 
$5,000 = $5,500/(1 + r) 
Solving for r, we get r = 0.1111 or 11.11%.

You Just Received a Loan from Your Banker to Buy