On a 1-year loan for $10,000, a firm would be better off borrowing at a rate of 9.5 percent discounted interest than
9 percent simple interest.

Question

Quizplus · Accepted Answer

In a discounted interest loan, the interest is deducted from the principal upfront, meaning the firm receives less than $10,000. In a simple interest loan, the firm receives the full $10,000 and pays interest on it. The effective interest rate on the discounted loan is higher than the nominal rate, making the simple interest loan more favorable.

On a 1-Year Loan for $10,000, a Firm Would Be