Question

Suppose you borrow from a bank $2,014.61 today (t=0). You agree to pay back $4,518.71 in 7 years (t=7). The interest rate (%) that the bank charge you is closest to ________%

Answer 1

The interest rate is computed as shown below:

Future value = Present value x (1 + r)ⁿ

$ 4,518.71 = $ 2,014.61 x (1 + r)⁷

$ 4,518.71 / $ 2,014.61 = (1 + r)⁷

($ 4,518.71 / $ 2,014.61)^{1 / 7} - 1 = r

2.242970103 ^0.142857143 - 1 = r

r = 12.23% Approximately