Problem 4-15 Effective Rate of Interest Find the interest rate (or rates of retu

Question

Problem 4-15
Effective Rate of Interest

Find the interest rate (or rates of return) for each of the following situations. Round your answers to two decimal places.

You borrow $700 and promise to pay back $749 at the end of 1 year.
%

You lend $700 and receive a promise to be paid $749 at the end of 1 year.
%

You borrow $60,000 and promise to pay back $136,716 at the end of 13 years.
%

You borrow $10,000 and promise to make payments of $2,445.7 at the end of each year for 5 years.
%

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Solution

Problem 4-15
Effective Rate of Interest

Find the interest rate (or rates of return) for each of the following situations. Round your answers to two decimal places.

You borrow $700 and promise to pay back $749 at the end of 1 year.
%

You lend $700 and receive a promise to be paid $749 at the end of 1 year.
%

You borrow $60,000 and promise to pay back $136,716 at the end of 13 years.
%

You borrow $10,000 and promise to make payments of $2,445.7 at the end of each year for 5 years.
%

Explanation / Answer

Calculation of Interest Rates 1 FV =PV(1+r)n 749= 700(1+r) 1+r = 749/700 r =.07 Interest Rate = 7% 2 FV =PV(1+r)n 749= 700(1+r) 1+r = 749/700 r =.07 Interest Rate = 7% 3 FV =PV(1+r)n 136716 = 60000(1+r)13 (1+r)13 = 136716/60000 (1+r)13 = 2.2786 R = .65 R = 6.5% Interest Rate = 6.5%

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