I'm currently reading Kellison's book, The Theory of Interest. I've reached the chapter on Effective Rate of Discount and it's somewhat confusing. The book explains it as a loan where interest is paid up-front and simply deducted from the Principal. That makes sense over one period, but for time > 1, the concept seems rather non-intuitive. How does one calculate the accumulated value of an investment with a given rate of discount?
Looking at discount as a function of interest, I can see how one would calculate the effective rate of discount. The book gives the formula as the ratio of interest earned during a period to the amount invested at the end of the period, which makes sense. This is in contrast to the effective rate of interest which is the ratio of interest earned during a period to the principal. But, given only a rate of say simple discount, how would one calculate the effective rate of discount during some arbitrary period n? That doesn't really make sense to me.
Would an investment using effective rate of discount over a period greater than 1 look like a treasury bond?
Answering a few specific questions would really help me. One is, how would you calculate the effective rate of discount during some arbitrary period n given a simple rate of discount? And, how can one calculate the accumulated value of an investment with a given rate of discount (simple or compound?)
For the first question above, here's an example from the problems in the book. "Given a rate of 10% simple discount, calculate the effective rate of discount during period 5."
Any explanations of what exactly this concept of discount is, or pointers to non-confusing resources would be appreciated. It seems very unintuitive.