Answer:
The interest rate, to the nearest percent, used in discounting this purchase transaction 8%.
Explanation:
The interest rate can be calculated using the following RATE function in Excel:
Interest rate = RATE(nper,pmt,-pv,fv,type)*n .............(1)
Where;
nper = number of periods = number of years to maturity * number of semiannual in a year = 5 * 2 = 10
pmt = semiannual payments = $63,101 = 63101
pv = present value = fair value balance = fair value - immediate down payment = $675,803 - $164,000 = $511,803 = 511803
fv = future value = desired cash balance after last payment = 0
type = when payments are due (0 = end of period. 1 = beginning of period) = 0
n = number of compounding period per year = number of semiannual in a year = 2
Substituting the values into equation (1), we have:
Interest rate = RATE(10,63101,-511803,0,0)*2 .................. (2)
Inputting =RATE(10,63101,-511803,0,0)*2 into an excel sheet (Note: as done in the attached excel file), the Interest rate is obtained as 8.00%.
Therefore, the interest rate, to the nearest percent, used in discounting this purchase transaction 8%.
