Suppose you borrow $15,000 and then repay the loan by making 12 monthly payments of $1,297.92 each. What rate will you be quoted on the loan?
What will be an ideal response?
The interest rate is the solution to the following:
PV = PMT × [(1 ? (1 + r)?N))/r] or $15,000 = $1,297.92 × [(1 ? (1 + r)?12))/r]
r = 0.5836 % per month
You will be quoted the monthly rate times 12 or 0.5836% × 12 = 7.00%. The effective annual rate is then found as 1.00583612 ? 1 = 7.23%.
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