Help with finance calculator

Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the next six years by making monthly payments of $2,215.10. What is the interest rate on the loan? Express your answer with annual compounding.

Here is what I put in

n = 72

I% = 0

PV = -135000

PMT = 2215.1

FV = 0

p/y = 12

c/y = 12

and the answer I get is 5.65% which is wrong, the correct answer is 5.80% and I have no idea how to get it.

Re: Help with finance calculator

Quote:

Originally Posted by

**nafiro** Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the next six years by making monthly payments of $2,215.10. What is the interest rate on the loan? Express your answer with annual compounding.

Here is what I put in

n = 72

I% = 0

PV = -135000

PMT = 2215.1

FV = 0

p/y = 12

c/y = 12

and the answer I get is 5.65% which is wrong, the correct answer is 5.80% and I have no idea how to get it.

The periodic monthly rate comes out to 0.47%

It seems the reply you are getting is an annual rate and the reply in the book is an annualized rate

Annual Rate = 0.0047 * 12 = 0.0564 = 5.64%

Annualized Rate = (1+ 0.0047 )^12 - 1 = (1.0047 )^12 - 1 = 1.057881 - 1 = 0.057881 = 5.788%

Not sure how it would be implemented in your calculator though

I used this online Excel RATE calculator to find the monthly rate

Re: Help with finance calculator

You need to go an extra step, to calculate what 5.65% annual

compounded monthly represents as effective annual rate:

(1 + .0565/12)^12 - 1 = .0579832.... or 5.80% rounded.

Easier to see using PV:FV; say $1000 earning 12% annual compounded monthly over 1 year:

1000(1 + .12/12)^12 = 1000(1.01)^12 = 1126.825...

You can "see" from that resulting balance that effective rate is 12.6825%