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Math Help - Help with finance calculator

  1. #1
    Newbie
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    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.
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  2. #2
    Member
    Joined
    Jan 2009
    From
    Punjab, Pakistan
    Posts
    88

    Re: Help with finance calculator

    Quote Originally Posted by nafiro View Post
    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
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  3. #3
    MHF Contributor
    Joined
    Dec 2007
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    Ottawa, Canada
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    68

    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%
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