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A bank agrees to lend you $1,000 today in return for your promise to pay back...

  1. 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?
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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%.

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