Question

Effective rate of interest Find the interest rates earned on each of the following. Round each answer to two decimal places. You borrow $720 and promise to pay back $756 at the end of 1 year. % You lend $720 and the borrower promises to pay you $756 at the end of 1 year. % You borrow $60,000 and promise to pay back $183,949 at the end of 13 years. % You borrow $15,000 and promise to make payments of $4,058.60 at the end of each year for 5 years. %

Answer 1

a.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

756=720*(1+r/100)

(756/720)=(1+r/100)

(1+r/100)=1.05

r=1.05-1

=5%

b.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

756=720*(1+r/100)

(756/720)=(1+r/100)

(1+r/100)=1.05

r=1.05-1

=5%

c.

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

183949=60000*(1+r/100)^13

(183949/60000)^(1/13)=(1+r/100)

(1+r/100)=1.09

r=1.09-1

=9%

d.

Let interest rate be x%

At this rate;present value of annual payments=15000

15000=4,058.60/1.0x+4,058.60/1.0x^2+4,058.60/1.0x^3+4,058.60/1.0x^4+4,058.60/1.0x^5

Hence x=interest rate=11%