What annual rate of return is implied on a $2,500 loan taken next year when $4,500 must be repaid in year 5?

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What annual rate of return is implied on a $2,500 loan taken next year when $4,500 must be repaid in year 5?

 

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Answer: FVA =$ 7507.74

Working noted for the above answer is as under

We have been provided with the information as

$200 received every 6 months

for 15 years

3% compounded semiannually

Formula for annuity is

Now we  put the figures in to the formula as under

FVS =200 * (1+0.03/2)15*2 -1 /0.03/2)

FVA =200* (1+0.015)30 -1 /0.015

Solving this equation we will get

FV A = $ 7507.74

Or you can use the following table for better understanding

Year Payments Interest Balance
1 400 3 403
2 400 15.18 818.18
3 400 27.73 1245.91
4 400 40.66 1686.57
5 400 53.98 2140.54
6 400 67.7 2608.24
7 400 81.83 3090.08
8 400 96.4 3586.47
9 400 111.4 4097.88
10 400 126.86 4624.73
11 400 142.78 5167.52
12 400 159.19 5726.7
13 400 176.09 6302.79
14 400 193.5 6896.3
15 400 211.44 7507.74
Totals 6000 1507.74 7507.74
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