Answer:
<u>The annual interest rate was 4%</u>
Step-by-step explanation:
1. Let's review the data given to us for solving the question:
Loan to Kenneth's niece to buy a computer = US$ 1,200
Duration of the loan = 2 years
Niece paid back to Kenneth = US$ 1,296
Annual interest rate = x%
2. Let's find the annual interest rate after 2 years, using the following formula:
FV = PV * (1 + x)
PV = Loan to Kenneth's niece to buy a computer = US$ 1,200
FV = Niece paid back to Kenneth = US$ 1,296
rate (r) = x
Replacing with the real values:
1,296 = 1,200 * (1 + x)
1.296/1.200 = (1 + x) (Dividing by 1,200 at both sides)
1.08 = 1 + x
1.08 - 1 = x (Subtracting 1 at both sides)
<u>0.08 = x</u>
This is the interest rate for two years, for finding the annual interest rate we divide it by 2, this way:
<u>0.08 / 2 = 0.04 * 100 = 4%</u>
