Finding implicit interest rates (truth-in-lending laws reduce the type of deception suggested by this problem). Friendly Loan Company advertises that it is willing to lend money for five years at the low rate of 8 percent per year. A potential borrower discovers that a five-year, $10,000 loan requires that the 8 percent interest be paid in advance, with interest deducted from the loan proceeds. The bonower will collect $6,000 [= $10,000 - (5 X .08 X $10,000)] in cash and must repay the

$10,000 loan in five annual installments of $2,000, one each at the end of the next five years. Compute the effective interest rate implied by these loan terms.

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