**Effective Rates of Interest and Discount**

The effective rate of discount is used in computing the present values of certain types of annuities. Assuming as the rate of interest per annum, an investor who deposits Re 1 at the beginning of the year would receive Re (1 + i) at the end of the year. If he demands the interest payment in the beginning of the period, as money has time value, he would obviously get an amount less than i (assumed to be d). He would effectively lend Re (1 – d) at the beginning of the year and get back Re 1 after one year. The relationship between i and d is called the effective rate of discount per annum. Symbolically,

d = i/(1+i)

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