Question

5-4: Finding the Interest Rate, I 5-16: Comparing Interest Rates Effective rate of interest Find the interest rates earned on each of the following. Round each answer to two decimal places. a. You borrow $700 and promise to pay back $770 at the end of 1 year. % b. You lend $700 and the borrower promises to pay you $770 at the end of 1 year. c. You borrow $58,000 and promise to pay back $182,802 at the end of 11 years. d. You borrow $14,000 and promise to make payments of $3,693.20 at the end of each year for 5 years.

Answer 1

Qa) Using financial calculator to calculate effective interest rate

Inputs: pv = -700

Fv = 770

Pmt = 0

N = 1

I/y = compute

We get, effective rate of interest as 10%

b) The answer is same as the above one because the data in this question is same as the above.

Therefore the effective rate of interest is 10%

c) Using financial calculator to calculate effective rate of interest

Inputs: pv = -58,000

Fv = 182,802

Pmt = 0

N = 11

I/y = compute

We get, effective rate of interest as 11%

d) Using financial calculator to calculate effective interest rate

Inputs: Pv = -14,000

Fv = 0

Pmt = 3,693.20

N = 5

I/y = compute

We get, effective rate of interest as 10%