Question

On March 28, 2008, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $100,000 on March 28, 2028, but investors would receive nothing until then. Investors paid DMF $22,364 for each of these securities.
Based on the $22,364 price, what rate was DMF paying to borrow money?

Answer 1

Answer:

DMF paying to borrow money at 7.78% return per year

Explanation:

given data

future value = $100,000

present value = $22,364

time period t = 20 year ( March 28, 2008 to March 28, 2028 )

solution

we get here rate of interest by the future value formula that is express as

rate = $(\frac{future\ value}{present\ value})^{1/t} -1$    ...............................1

put here value and we get rate of interest that is

rate = $(\frac{100000}{22364})^{1/20} - 1$    

solve it and we get

rate = 0.0778

rate = 7.78 %

so DMF paying to borrow money at 7.78% return per year