Question

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.

Step 1

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}

Step 2

(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:

Step 3

(b)

Given,

Lend/Principal Amount (P) = $1,850

Repaid Amount (A) = $2,078.66

Time in years (t) = 2

Type of c...

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