If you borrow $20 000 as a five-year loan from the bank and the bank requires you to make end-of-year payments of $4878.05,what is the annual interest rate on this loan?
A)8 percent
B)6 percent
C)7 percent
D)4 percent

Question

Quizplus · Accepted Answer

Using the formula for the present value of an annuity:

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

where PV is the present value (the amount borrowed), PMT is the end-of-year payment, r is the annual interest rate, and n is the number of payments (in this case, 5).

Substituting the known values:

20000 = 4878.05 x (1 - 1/((1+r)^5))/r

Solving for r:

r = 0.07 or 7 percent

Therefore, the annual interest rate on this loan is 7 percent.

If You Borrow $20 000 as a Five-Year Loan from the Bank