Bob Wheems borrowed $1,000.He received $840 and must repay the loan in one year.This is an example of a discount loan with an APR of 16 percent.

Question

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In a discount loan, the interest is deducted from the principal upfront. If Bob received $840 from a $1,000 loan, the interest is $160. The APR is calculated as interest/principal, which is $160/$1,000 = 16%. However, the effective interest rate is higher because he only received $840, not $1,000.

Bob Wheems Borrowed $1,000