Question

If you borrow $9,725 and are required to pay back the loan in five equal annual instalments of $2,500, what is the interest rate associated with the loan?

Answer 1

The interest rate associated with the loan is approximately 11.4%.

Step-by-step explanation:

To find the interest rate associated with the loan, we can use the formula for calculating the present value of an annuity. The present value of an annuity formula is:

Loan Amount = Payment Amount * (1 - (1 + Interest Rate)^(-Number of Payments))) / Interest Rate

Plugging in the given values, we have:

$9,725 = $2,500 * (1 - (1 + Interest Rate)^(-5))) / Interest Rate

Simplifying the equation and solving for the Interest Rate, we find that the interest rate associated with the loan is approximately 11.4%.