Hello, Present value of an annuity due is €600,000 Yearly repayments is = €50,000 Period (n)...

Hello,
Present value of an annuity due is €600,000

Yearly repayments is = €50,000

Period (n) = 10 years

Calculate the interest rate on this loan, assuming the first payment is made immediately.

Please show all your working out.

Solutions

Expert Solution

Yearly payments is given as €50,000 and number of payments, 10.

Accordingly, total payment itself, without considering time value of money =€50,000*10 =€500,000.

On discounting the cash flows at a positive interest rate, Present Value should have been less than €500,000 (Or the yearly payments should have been more than 600,000/10=60,000). However, the PV, as per problem, is higher at €600,000. This will be possible only with interest at negative rate.

Interest rate of the annuity= -3.836008% calculated using the RATE function of Excel as follows:

jeff jeffy answered 1 year ago

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