Answer:
interest is compounded monthly
Step-by-step explanation:
there is a slight mistake in the question, the future value after 25 years is $17,208.63, not $7,208.63
the future value = present value x (1 + i/a)ⁿᵃ
future value = $17,208.63
present value = $6,033
i/a = 4.2%/a
n x a = 25a
(1 + 0.042/a)²⁵ᵃ = $17,208.63 / $6,033 = 2.852416708
²⁵√(1 + 0.042/a)²⁵ᵃ = ²⁵√2.852416708
(1 + 0.042/a)ᵃ = 1.042818
4.2818% would be the effective interest on the loan, so we can try different options for a. Since the effective interest is higher, I will try first with monthly compounding:
a = 12 (compounded monthly)
(1 + 0.042/12)¹² = (1 + 0.0035)¹² = 1.042818 ✓
