Question

Effective rate of interest

Find the interest rates earned on each of the following. Round each answer to two decimal places.

1. You borrow $700 and promise to pay back $735 at the end of 1 year.

   %

2. You lend $700 and the borrower promises to pay you $735 at the end of 1 year.

   %

3. You borrow $78,000 and promise to pay back $196,418 at the end of 12 years.

   %

4. You borrow $9,000 and promise to make payments of $2,684.80 at the end of each year for 5 years.

Answer 1

a. The effective interest rate is :

PV = $700, since you borrow $700

FV = ($735), since you pay back the sum of money

N= 1 YEAR

PMT = 0

I/Y = 5

b. PV = ($700), Since you are lending the sum of money

FV= $735 , since you are getting paid back this sum.

N =1 YEAR

PMT = 0

COMPUTE I/Y

I/Y = 5%

Therefore, the effective interest rate is 5%.

c. PV = $78,000

FV = ($196,418)

N= 12 YEARS

PMT = 0

COMPUT I/Y

I/Y = 8%

d. PV = $9000

FV = 0

N = 5 YEARS

PMT = ($2,684.8), Since you promised to pay a certain sum of money at the end of every year.

COMPUTE I/Y

I/Y = 14.99%