Question

A loan of $1,000 is being repaid by equal annual installments over a 20 year period. if the total principal repaid during the first 10 years is $400, find the effective annual interest rate.

Answer 1

Rate = 2.5%

Step-by-step explanation:

Simple interest I = Principal (P) × Rate (R) × Time (T) / 100

Since these are equal installments half of the loan will be repaid in the first ten years. Half on one thousand is $500. We have amount= principal + interest

500= 400 + I

I= 500-400= $100

Simple interest I = Principal (P) × Rate (R) × Time (T) / 100

100= 400 × 10 × R/100

100= 40 R

R= 100/40= 2.5%