Discounting has the effect of reducing the available funds received by the borrower while raising the effective interest rate.

Question

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Discounting involves deducting a certain percentage of the loan amount as a fee or commission before disbursing the funds to the borrower. This means that the borrower receives less than the full loan amount, reducing the available funds. Additionally, since the interest rate is applied to the full loan amount, the effective interest rate increases due to the reduced funds received by the borrower.

Discounting Has the Effect of Reducing the Available Funds Received