Under the discount method of interest calculations, the interest that will be due on an investment is calculated and withheld from the borrower when the loan or investment is made. For example, someone who borrows $1,000 for a year at a 10% interest rate would actually receive just $900 ($1,000 minus 10% of $1,000, or $100), and then pay back $1,000 a year later. The effective interest rate would thus exceed 11%, $100 divided by the $900 that the borrower had the use of during the year.

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