Solving for Rates What annual rate of return is implied on a $1,000 loan taken next year when $1,500 must be repaid in year 5?
A)8.45 percent
B)10.00 percent
C)10.67 percent
D)12.50 percent

Question

Quizplus · Accepted Answer

We can use the formula for future value of a present sum to solve for the implied rate of return: 
$1,500 = $1,000 (1 + r)^4 
Simplifying, we get: 
1.5 = (1 + r)^4 
Taking the fourth root of both sides: 
(1 + r) = 1.1247 
Subtracting 1 from both sides: 
r = 0.1247 or 12.47% 
Rounding to two decimal places, the answer is 10.67% which is option C.

Solving for Rates What Annual Rate of Return Is Implied