This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $30,000 for one year. The interest rate is 13.5 percent. You and the lender agree that the interest on the loan will be .135 $30,000 = $4,050. So the lender deducts this interest amount from the loan up front and gives you $25,950. In this case, we say that the discount is $4,050.

What is the effective annual rate?