Discount interest ________ the effective annual interest rate on a loan and compensating balances ________ it

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Discount interest effectively increases the cost of borrowing because interest is deducted from the principal before the borrower receives the funds, leading to a higher effective annual interest rate. Compensating balances also increase the effective interest rate because they require the borrower to maintain a minimum balance in a non-interest-bearing account, effectively reducing the amount of the loan available for use while still paying interest on the full loan amount.

Discount Interest ________ the Effective Annual Interest Rate on a Loan