Bill borrowed $100,000 today that he must repay in 15 annual end-of-year installments of $10,000.What annual interest rate is Bill paying on his loan?
A) 2.222%
B) 3.333%
C) 5.556%
D) 33.33%

Question

Quizplus · Accepted Answer

To find the annual interest rate, we need to use the present value formula of an annuity:

PV = PMT x (1 - 1/(1 + r)^n) / r

Where PV is the present value (amount borrowed), PMT is the periodic payment (annual installment), r is the annual interest rate, and n is the number of periods (15 years).

Substituting the given values, we get:

100,000 = 10,000 x (1 - 1/(1 + r)^15) / r

Solving for r using trial and error or a financial calculator, we get r = 5.556%. Therefore, the answer is C).

Bill Borrowed $100,000 Today That He Must Repay in 15