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26 August, 11:47

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.

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  1. 26 August, 11:51
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    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%
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