On this date last year, you borrowed $3,900. You have to repay the loan with a lump sum payment of $6,000 six years from now. What is the interest rate?

Question

Quizplus · Accepted Answer

The correct answer can be found using the formula for the future value of a single sum, which is $FV = PV(1 + r)^n$, where FV is the future value ($6,000), PV is the present value ($3,900), r is the interest rate per period, and n is the number of periods (6 years). Rearranging the formula to solve for r gives $r = \left(\frac{FV}{PV}\right)^{\frac{1}{n}} - 1$. Substituting the given values gives $r = \left(\frac{6000}{3900}\right)^{\frac{1}{6}} - 1$, which calculates to approximately 0.0635 or 6.35 percent.

On This Date Last Year, You Borrowed $3,900