Question

Lang Warehouses borrowed $146,960 from a bank and signed a note requiring 10 annual payments of $19,032 beginning one year from the date of the agreement. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Determine the interest rate implicit in this agreement. (Round interest rate to 1 decimal place.)

Answer 1

Answer:

The interest rate is 5%

Explanation:

Loan amortization is a method of loan repayment where a series of equal periodic installments is made by the borrower to offset the entire loan obligation. Each equal repayment covers the interest due on the loan so far and a portion of the principal amount.

At the beginning of the loan contract, the borrower is usually provided with information on the number of equal repayment installments that, if consistently paid, would offset the entire loan obligation (principal plus interest)

This is determined as follows:

repayment installment= Loan amount/Annuity factor

A special table called the Present Value of Annuity table is used to determined the annuity factor. All you need to use the table is the loan repayment period (years) " N " and the agreed interest rate " r "

So we apply this to question:

19,032= 146,960/ Annuity factor

Annuity factor= 146,960/19,032= 7.7217

We can look up this same figure in the table, to ascertain the the number of years and the rate rate. The number of years is already given as 10.

So we look up for the figure 10 under the the column labeled "n" , trace it through the row vertically to locate 7.7217. The rate that gives this figure is the applicable interest rate. This rate will be located by tracing upward from the point where we found 7.7217.

The interest rate is 5%