Question

Effective rate of interest

Find the interest rates earned on each of the following. Round each answer to two decimal places.

1. You borrow $710 and promise to pay back $781 at the end of 1 year.

   %

2. You lend $710 and the borrower promises to pay you $781 at the end of 1 year.

   %

3. You borrow $86,000 and promise to pay back $370,698 at the end of 14 years.

   %

4. You borrow $20,000 and promise to make payments of $6,687.60 at the end of each year for 5 years.

   %

Answer 1

EAR = ((Ending value / Beginning value)^( 1 / Number of periods)) - 1
a.
EAR	=(781/710)^(1/1)-1	10.00%
b.
EAR	=(781/710)^(1/1)-1	10.00%
c.
EAR	=(370698/86000)^(1/14)-1	11.00%
Year	Cash flow
0	-20000
1	6687.6
2	6687.6
3	6687.6
4	6687.6
5	6687.6
	=IRR(B292:B297)
EAR	20%
Answers :
a. 10.00%
b. 10.00%
c. 11.00%
d. 20.00%

Answer for a and b are same the only difference is in option a your are borrowing @10% EAR where as in option b you are receiving 10% EAR

10.00% 10.00% 11.00% 284 EAR = ((Ending value / Beginging value)^(1/ Number of periods)) - 1 285 a. 286 EAR =(781/710)^(1/1)-1 287 b. 288 EAR =(781/710)^(1/1)-1 289 C. 290 EAR =(370698/86000)^(1/14)-1 291 292 Year Cash flow 293 -20000 6687.6 295 6687.6 296 6687.6 297 6687.6 298 6687.6 299 =IRR(B292:B297) 300 EAR 20% 294 Nm 301 302 swers: 303 a. 10.00% 304 b. 10.00% 305 c. 11.00% 306 d. 20.00%