What annual rate of return is implied on a $5,000 loan taken next year when $7,700 must be repaid in year 8?
A) 6.36 percent
B) 7.12 percent
C) 8.54 percent
D) 11.62 percent

Question

Quizplus · Accepted Answer

The implied annual rate of return can be calculated using the formula for the future value of a single sum: FV = PV(1 + r)^n, where FV is the future value ($7,700), PV is the present value ($5,000), r is the rate of return, and n is the number of periods (7 years, since the loan is taken next year and repaid in year 8). Rearranging the formula to solve for r gives us r = (FV/PV)^(1/n) - 1. Plugging in the values gives us r = ($7,700/$5,000)^(1/7) - 1 ≈ 0.0636 or 6.36%.

What Annual Rate of Return Is Implied on a $5,000