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Matthew needed money for some unexpected expenses, so he borrowed $2,587.09 from a friend and agreed to repay the loan in three equal installments of $950 at the end of each year. What is the implied interest rate in this agreement?

Answer :

The implied interest rate in this agreement is 3.3%

Explanation:

Total loan paid at end of third year = $950*3= $2850

Implied rate = (forward / spot) raised to the power of (1 / time) – 1

 Implied rate = [(2850/2587.09) raised to the power of (1/3) – 1] * 100

 Implied rate =  [1.0328 – 1] * 100

 Implied rate = 0.033  * 100

     Implied rate = 3.3%

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