Question

6. A bank agrees to lend you $1,000 today in return for your promise to pay back $2,773 nine years from today. What rate of interest is the bank charging you?
   

Answer 1

Future value = present value * (1 + interest rate)^{number of years}

Here, the future value is the amount paid back after 9 years, which is $2,773.

The present value is the amount borrowed today, which is $1,000.

Let us say the interest rate is R. Then :

$2,773 =  $1,000 * (1 + R)⁹

R = ($2,773 / $1,000)^1/9 - 1

R = 0.1199, or 11.99%.