Finding the Interest Rate: Concept Connection Example 6-3 (page 237) 18. What interest rates are implied by the following lending arrangements?a. You borrow $500 and repay $555 in one year.b. You lend $1,850 and are repaid $2,078.66 in two years.c. You lend $750 and are repaid $1,114.46 in five years with quarterly compounding.d. You borrow $12,500 and repay $21,364.24 in three years under monthly compounding. (Note. In parts c and d, be sure to give your answer as the annual nominal rate.)Lasher, William R.. Practical Financial Management (Page 276). South-Western College Pub. Kindle Edition.
Finding the Interest Rate: Concept Connection Example 6-3 (page 237) 18. What interest rates are implied by the following lending arrangements?
a. You borrow $500 and repay $555 in one year.
b. You lend $1,850 and are repaid $2,078.66 in two years.
c. You lend $750 and are repaid $1,114.46 in five years with quarterly compounding.
d. You borrow $12,500 and repay $21,364.24 in three years under monthly compounding. (Note. In parts c and d, be sure to give your answer as the annual nominal rate.)
Lasher, William R.. Practical Financial Management (Page 276). South-Western College Pub. Kindle Edition.
Interest rate:
An interest rate is a percentage on the principal amount at which a lender gives money to a borrower and it’s an excess amount on the principal amount. It is generally represented as an annual rate.
Compounding Interest:
It is the method for computing interest at the initial amount of principal which includes the previous period’s accumulated interest. It can be compounded annually, half-yearly, quarterly and daily. The rate of compounding interest depends on the frequency of compounding.
Formula for the calculation of Amount (A) using Compounded Interest:
Amount (A) = Principal Amount (P) * (1 + rate of interest (r) / Number of times compounded (n))n*time period
(a)
Given,
Loan/Principal Amount (P) = $500
Repay Amount (A) = $555
Time in years (t) = 1
Type of compounding interest = Annually
Calculation of Interest rate:
Image Transcriptionclose
Repay Amount (A) Loan/Principal Amount (P) * (1 Interest rate () fime () $555 $500 * (1 +Interest rate $555 $5001 + Interest rate (r) 1.11 1Interest rate (r) 1.11 1 Interest rate (r) - 0.11 or 11% = Interest rate (t)
(b)
Given,
Lend/Principal Amount (P) = $1,850
Repaid Amount (A) = $2,078.66
Time in years (t) = 2
Type of c...
Image Transcriptionclose
(1)t Repaid Amount (A) Lend/Principal Amount (P) * (1 + Interest rate fime $2,078.66 $1,850 * (1 + Interest rate ()) $2,078.66 $1,850 (1Interest rate (t) () (1Interest rate 1.1236 (1.1236)12 1 +Interest rate () 1.06 1Interest rate (r) 1.06 1 Interest rate (r) 0.06 or 6% Interest rate (r)
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