Question

You borrow $20000 and agree to pay it off with a single payment of $35000 in 4 years. What annual rate of interest will you be charged?

Answer 1

FV = PV (1 + r)^n

Where,

Maturity value (FV) = $35000

Present value (PV) = $20000

Time (n) = 41.150163 = (1 + i)

Let's put all the values in the formula to solve for interest rate (i)

35000 = 20000 (1 + i) ^4

35000/ 20000 = (1 + i) ^4

1.75 = (1 + i) ^4

4?1.75 = (1 + i)                                                  {Taking 4th root of 1.75}

1.150163 = (1 + i)

i = 1.150163 - 1

i = 0.15016

So interest rate is 0.1502 or 15.02%

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