1 answer

Effective Rate of Interest A mortgage company offers to lend you $85,000; the loan calls for...

Question:

Effective Rate of Interest A mortgage company offers to lend you $85,000; the loan calls for payments of $8,347.06 at the end
Effective Rate of Interest A mortgage company offers to lend you $85,000; the loan calls for payments of $8,347.06 at the end of each year for 30 years. What interest rate is the mortgage company charging you? Do not round Intermediate calculations. Round your answer to two decimal places

Answers

This can be solved using the Present value of annuity formula
Present value of annuity is = P*(1-(1+r)^-n)/r
"P" is Payment at the end of each year = $ 8,347.06/.
Present value of annuity is = $ 85,000
"r" is Effective interest rate = ?
"n" is No of years = 30
85000=8347.06*(1-(1+r)^-30)/r
(1-(1+r)^-30)/r=(85000/8347.06)
(1-(1+r)^-30)/r=10.18322619
(1-(1+r)^-30)=10.18322619*r
Using trial and error, r is = 9.10% Approx.
Answer is 9.10% Approx.
.

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