This question illustrates what is known asdiscount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $23,000 for one year. The interest rate is 12.8 percent. You and the lender agree that the interest on the loan will be .128 $23,000 = $2,944. So the lender deducts this interest amount from the loan up front and gives you $20,056. In this case, we say that the discount is $2,944.

What is the effective annualrate?