A loan of $1,000 is being repaid by equal annual installments over a 20 year period. if the total principal repaid during the first 10 years is $400, find the effective annual interest rate.

Rate = 2.5%

Explanation:

Simple interest I = Principal (P) * Rate (R) * Time (T) / 100

Since these are equal installments half of the loan will be repaid in the first ten years. Half on one thousand is $500. We have amount = principal + interest

500 = 400 + I

I = 500-400 = $100

Simple interest I = Principal (P) * Rate (R) * Time (T) / 100

100 = 400 * 10 * R/100

100 = 40 R

R = 100/40 = 2.5%