If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is about 8.7 percent.

Question

Quizplus · Accepted Answer

This is true. When borrowing on a discount basis, the interest is withheld upfront, and the borrower receives the net amount. The effective rate of interest is calculated by dividing the interest paid by the net amount received. In this case, $80 ($1,000 x 8%) is withheld, and the borrower receives $920. Therefore, the effective rate of interest is ($80/$920) x 100 = 8.69565, which is rounded to 8.7 percent.

If One Borrows $1,000 at 8 Percent Interest on a Discount