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The annual effective discount rate expresses the amount of interest paid or earned as a percentage of the balance at the end of the annual period. It is related to but slightly smaller than the effective rate of interest, which expresses the amount of interest as a percentage of the balance at the start of the period. The discount rate is commonly used for U.S. Treasury bills and similar financial instruments.
For example, consider a government bond that sells for $95 and pays $100 in a year's time. The discount rate is
The effective interest rate is calculated using 95 as the base
which says that 95 % {\displaystyle 95\%} of $105.26 is $100.
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