The bank made a 3-year loan 7% discount rate, with no coupons and a par value of $1,000. If immediately after the loan was made, because of higher inflation expectations, the discount rate increased to 9%. What is the effect of the interest rate change on the value of the loan?    (a) Declines by 1.94%    (b) Increases by 5.4%    (c) Increases by 2.0%    (d) Declines by 5.4%

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.