Question

You borrow $10,000 and agree to pay back $12,000 in 3 years. What is the annual interest rate you're being charged?

Answer 1

Current borowed amount(Present Value) = $10,000

Amount to be paid back in 3 years ( Future Value) = $12,000

Calculating the Annual Interest rate:-

Future Value = Present Value*(1+r)^n

Where,

r = Periodic Interest rate

n= no of periods = 3

$12,000 = $10,000*(1+r)^3

1.2 = (1+r)^3

Taking 3-root on both sides,

1.062659 = (1+r)

r = 6.27%

So, the annual interest rate you're being charged is 6.27%