Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is ________.
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent

Question

Quizplus · Accepted Answer

The correct answer can be found by using the formula for the present value of an annuity, which calculates the original loan amount based on the annual payments, interest rate, and number of periods. By plugging the given values into the formula or using a financial calculator, it can be determined that an interest rate of 7 percent results in a present value (or loan amount) of $20,000 when the annual payments are $4,878.05 for five years.

Detta Borrows $20,000 from the Bank