Question

Domestica’s stock of debt was 100 Externalia dollars at the beginning of 2012 and it was 140 Externalia dollars at the end of 2012. Furthermore, in 2012 Domestica paid 15 Externalia’s dollars in interest payments on its external debt. Compute the implicit interest rate in 2012, in percent and using only one decimal.

Answer 1

In the absence of an explicit rate, a debtor (Domestica) can calculate the cost of borrowing by deducting the principal from the total cost of the proposed payments. If you borrow $1,000 and agree to make 12 payments of $100 on the debt, then the loan agreement has an implicit interest rate of 20 percent.

Here Domestica borrowed 140 Externalias.

Assuming Domestica paid back the entire sum (140) with interest (15) in 2012, then principal = 140 and implicit interest rate = interest / principal = 15/140 = 10.7%

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