Calculating Average Annual Compound Rate of Interest
Jake's Loan from His Father
Jake borrowed $18,000 from his father to purchase a camper. He paid back $25,000 to his father at the end of 6 years.
Jake's loan is an example of a financial transaction where he borrowed money from his father and paid it back with interest over a period of time. In this case, Jake borrowed $18,000 and paid back $25,000 after 6 years. To calculate the average annual compound rate of interest on Jake's loan, we can use the following formula:
Answer:
5.63%
Explanation:
The annual compound rate of interest on Jake's loan from his father is calculated as :
PV = $18,000
N = 6
P/yr = 1
Pmt = $ 0
FV = - $25,000
i = ?
Using a financial calculator to input the values as shown above, the annual compound rate of interest is 5.6277 % or 5.63%
Question:
What was the average annual compound rate of interest on Jake's loan from his father?
Answer:
5.63%