Question

A loan is being repaid with payments of $395 made at the beginning of each year for 17 years. Determine the effective annual rate of interest charged if the loan amount is $5081.27.

Answer 1

3.76%

Step-by-step explanation:

I did this computation using excels Rate function. I will show you how to do the same in this solution

From our question,

We have:

Loan amount = Present Value(PV) = -5081.27

Payments at periods PMT = $ 395

The Future Value (FV) = 0

We were given Period (NPER) = 17

The Type = 1 because payments are made at the start of each year.

To get rate = RATE (NPER, PMT,PV,FV,Type, Guess)

= RATE(17,395,-5081.27,0,1,0)

= 3.76%

The effective annual rate = 3.76%