This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 13 percent. You and the lender agree that the interest on the loan will be .13 3 $25,000 5 $3,250. So the lender deducts this interest amount from the loan up front and gives you $21,750. In this case, we say that the discount is $3,250. What’s wrong here?
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