Question

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

You borrow $740 and promise to pay back $777 at the end of 1 year. %

You lend $740 and the borrower promises to pay you $777 at the end of 1 year. %

You borrow $82,000 and promise to pay back $254,680 at the end of 10 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.

Interest rate = ($777 - $740) / $740

= $37 / $740

= 5.00%

Interes rate is 5.00%.

b.

Interest rate = ($777 - $740) / $740

= $37 / $740

= 5.00%

Interes rate is 5.00%.

c.

Annual Interest rate = [($254,680 / $82,000) ^ (1 / 10)] - 1

= (3.1059 ^ 0.1) -1

= 1.1200 - 1

= 12%

Annual Interest rate is 12%.

d.

Annual interest rate for 5 year annuity is calculated in excel and screen shot provided below:

Annual Interest rate is 11.00%.