Question

Find the interest rates earned on each of the following. Round your answers to the nearest whole number. a. You borrow $750 and promise to pay back $795 at the end of 1 year. 6 % b. You lend $750 and the borrower promises to pay you $795 at the end of 1 year. 6 % c. You borrow $56,000 and promise to pay back $260,534 at the end of 11 years. D % d. You borrow $10,000 and promise to make payments of $2,504.60 at the end of each year for 5 years. %

Answer 1

a] and b] are answered correctly.

Interest rate = (amount repaid - amount borrowed) / amount borrowed

Interest rate = (795 - 750) / 750 = 6%

c]

amount repaid = amount borrowed * (1 + interest rate)^{number of years}

$260,534 = $56,000 * (1 + interest rate)¹¹

interest rate = ($260,534 / $56,000)^1/11 - 1

interest rate = 15%

d]

Interest rate is calculated using RATE function in Excel :

nper = 5 (total number of payments)

pmt = -2504.60 (this is entered with a negative sign because it is a payment)

pv = 10000 (amount borrowed)

RATE is calculated to be 8%

X f A1 2 : B =RATE(5,-2504.6,10000) E F A C D