lick here to read the eBook: Finding the Interest Rate, I lick here to read the

Question

lick here to read the eBook: Finding the Interest Rate, I lick here to read the eBook: Comparing Interest Rates FFECTIVE RATE OF INTEREST ind the interest rates earned on each of the following. Round each answer to two decimal places. . You borrow $700 and promise to pay back $756 at the end of 1 year. b. You lend $700 and the borrower promises to pay you $756 at the end of 1 year. C. You borrow $62,000 and promise to pay back $189,660 at the end of 8 years. d. You borrow $10,000 and promise to make payments of $2,504.60 at the end of each year for 5 years

Explanation / Answer

Answer a.

Amount borrowed = $700
Amount repaid = $756
Period = 1 year

Interest Rate = (Amount repaid / Amount borrowed)^(1/Period) - 1
Interest Rate = ($756 / $700) - 1
Interest Rate = 1.08 - 1
Interest Rate = 0.08 or 8.00%

Answer b.

Amount borrowed = $700
Amount repaid = $756
Period = 1 year

Interest Rate = (Amount repaid / Amount borrowed)^(1/Period) - 1
Interest Rate = ($756 / $700) - 1
Interest Rate = 1.08 - 1
Interest Rate = 0.08 or 8.00%

Answer c.

Amount borrowed = $62,000
Amount repaid = $189,660
Period = 8 years

Interest Rate = (Amount repaid / Amount borrowed)^(1/Period) - 1
Interest Rate = ($189,660 / $62,000)^(1/8) - 1
Interest Rate = 3.05903^(1/8) - 1
Interest Rate = 1.15 - 1
Interest Rate = 0.15 or 15.00%

Answer d.

Amount borrowed = $10,000
Annual repayment = $2,504.60
Period = 5 years

Let interest rate be i%

$10,000 = $2,504.60 * PVIFA(i%, 5)
PVIFA(i%, 5) = 3.99265

Using financial table, i = 8.00%

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