Question

If I promise to pay back $2 tomorrow for a dollar received today. Calculate the effective annual interest rate on this transaction

Answer 1

We can use the present value of sum formula to calculate the effective annual interest rate
PV = F / (1+r)^n
PV = today's value = $1
F = tomorrow's value = $2
r = interest rate per day = ?
n = number of days in a year = 365
1 = 2 / (1+r)^365
(1+r)^365 = 2
r = 0.0019
Interest rate per day = 0.0019
Effective annual interest rate = 0.0019 * 365 days = 69.35%