The effective rate of interest is 6%.
The percentage of interest on a loan or financial product if compound interest builds up over the course of a year during which no payments are made is known as the effective interest rate, also known as the effective annual interest rate, annual equivalent rate, or simply effective rate.
Given;
To estimate the change in interest due to the loan discount points paid, follow this straightforward formula: The rate of interest rises by around 1/8 percent for each point the lender charges.
Step 1: The interest rate will increase by 1% or eight discount points at a rate of 1/8%.
Step 2: 5% (borrower-paid rate) plus 1% (discount-related increase) equals 6%. (Effective yield)
The effective rate of interest is 6%.
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