Assume that you borrow $5,000 and pay back the $5,000 plus $250 in interest at the end of the year...?

Question

Assuming no inflation, what is the real interest rate? What would the interest rate be if the $250 of interest had been discounted at the time the load was made? What would this interest rate be if you were required to repay the loan in 12 equal monthly installments?

Answer 1

a) End of period payment with no inflation

Real interest rate = 250/5'000=0.05= 5%

b)

Loan = 5'000-250=4'750

Real interest rate = 250/4'750= 0.0526 = 5.26%

c)

Real interest rate =16.35%

For loan = $5'000 and monthly payments = $437.5