Two discount points on a loan typically increase the effective interest rate by about 1/4% to 1/2%. In this case, the closest estimates without specific loan details are either approximately 7 1/4% or 7 1/2%.
The question asks about the increase in the effective interest rate due to the payment of two discount points on a 7% loan. Discount points are prepaid interest, and paying them effectively raises the interest rate above the nominal rate of the loan. To calculate the increase in effective interest rate, one must consider the upfront payment of discount points and their effect over the term of the loan.
Generally speaking, each discount point increases the rate by approximately 1/8% to 1/4%. Without the exact method of calculation for this scenario (amortization schedule, loan term), a precise answer cannot be given, but considering the general guideline, two discount points could potentially increase the rate by approximately 1/4% to 1/2%. Therefore, the closest answer in options would be B. 7 1/4% or C. 7 1/2% depending on the loan details, which are not provided.
Based on the context from the question, where an increase in available funds can lead to a decrease in interest rates due to competition among lenders, it's imperative to understand the dynamics between lender competition, discount points, and the effective interest rate.