Question

Find the interest rates earned on each of the following. Round your answers to the nearest whole number.

1. You borrow $720 and promise to pay back $792 at the end of 1 year.

     %

2. You lend $720 and the borrower promises to pay you $792 at the end of 1 year.

     %

3. You borrow $58,000 and promise to pay back $116,659 at the end of 5 years.

     %

4. You borrow $12,000 and promise to make payments of $2,771.70 at the end of each year for 5 years.

     %

Answer 1

a.Information provided:

Present value= $720

Future value= $792

Time= 1 years

The question is solved by computing the yield to maturity.

The yield to maturity is computed by entering the below in a financial calculator:

FV= 792

PV= -720

N= 1

Press the CPT key and I/Y to compute the yield to maturity.

The answer obtained is 10.

Therefore, the interest rate is 10%.

b.Information provided:

Present value= $720

Future value= $792

Time= 1 years

The question is solved by computing the yield to maturity.

The yield to maturity is computed by entering the below in a financial calculator:

FV= 792

PV= -720

N= 1

Press the CPT key and I/Y to compute the yield to maturity.

The answer obtained is 10.

c.Information provided:

Present value= $58,000

Future value= $116,659

Time= 5 years

The question is solved by computing the yield to maturity.

The yield to maturity is computed by entering the below in a financial calculator:

FV= 116,659

PV= -58,000

N= 5

Press the CPT key and I/Y to compute the yield to maturity.

The answer obtained is 15.

Therefore, the interest rate is 15%.

d.Information provided:

Present value= $12,000

Annual payment= $2771.70

Time= 5 years

The question is solved by computing the yield to maturity.

The yield to maturity is computed by entering the below in a financial calculator:

PV= -12,000

PMT= 2771.70

N= 5

Press the CPT key and I/Y to compute the yield to maturity.

The answer obtained is 5.

Therefore, the interest rate is 5%.