Question: This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $12,000

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $12,000 for one year. The interest rate is 13 percent. You and the lender agree that the interest on the loan will be .13 X $12,000 = $1,560. So the lender deducts this interest amount from the loan up front and gives you $10,440. In this case, we say that the discount is $1,560. What's wrong here?

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To find the APR and EAR we need to use the actual cash flows of the loan In other words the intere... View full answer

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