A company that borrows $50 million and repays this loan in a lump-sum of $55 million in two years is paying, effectively, annual interest at the rate closest to:

Question

Quizplus · Accepted Answer

The effective annual interest rate can be calculated using the formula for the compound annual growth rate (CAGR), which is [(Ending Value/Beginning Value)^(1/Number of Years)] - 1. Here, the ending value is $55 million, the beginning value is $50 million, and the number of years is 2. Plugging these values into the formula gives us [(55/50)^(1/2)] - 1 = 0.0488 or 4.88%.

A Company That Borrows $50 Million and Repays This Loan