Any Finance people in here? need help with a formula

[jimrawr]

Im trying to find the effective interest rate of a 6 year loan, 8% SIMPLE interest.

Does anyone know the formula? Ive looked around on the net for awhile, and i cant find the simple interest rate formula, only the compounding

 

[DannyBoy]

Dont you need a value to complete the formula (i.e. An amount to borrow)??

 

[jimrawr]

thats what i thought, but the question I have here doesnt show an amount borrowed.. also, I already have the answer from my ti-83.. so you dont need an amount i guess

I just need to formula so I know how to get the answer on my own..

 

[NeoV]

EXAMPLE:

What effective rate will a stated annual rate of 6% yield when compounded semiannually?

Effective Rate = ( 1 + .06 / 2 )2 - 1 = .0609

your loan I am assuming would only compound once a year,

 

[jimrawr]

But im supposed to be using simple intrest that doesnt compound.. this formula gives me a diffrent effective rate than my ti-83 gave me

( 1 + .08 / 6 ) 6 - 1

 

[Hector13]

I think your question is screwed up... the effective rate will be exactly 8% if you are compounding annualy. Maybe they want the total growth of money over 6 years?? ie, 1.08^6 - 1?

 

[jimrawr]

This is the exact question. I think maybe he is looking to see the 8%, and that it doesnt change even with a change in years


"A person takes out a loan at 8% simple interest for 6 years. What is the effective interest rate of the loan? (Bonus, what if he takes out the loan for 1 million years)"

 

[SLU MD]

the answer is probably 8%, but here is another idea i'm gonna toss out there.


assuming you dont want compounding, this is how i see it. could be wrong, but this is the best i got. say you start w/ 100 dollars. with no compounding, each year you would get 8 dollars in interest. after 6 years, that gives you 48 dollars of interest. so at the end of 6 years your total is 148 dollars. now if you take that backward using a financial calculator (which if u dont have, you NEED, makes finance life soo much easier). you'll have these inputs.

N = 6
PV = -100, must be negative b/c you are putting the money away in an account (trust me on this one)
PMT = 0
FV = 148

then hit CPT, then I/Y

your answer is 6.7522%

hope that helps. if you have the real problem and need an answer, PM me and i'll find the answer if you dont have a financial calculator. if u are gonna buy one, the BA II plus from Texas Instruments is cheap and GREAT.


SLU MD <-----doctor that was a finance major in college.

 

[Hector13]

xxSLUxxMDxx: I must be reading the question differently than you... I don't see it saying that there is no compounding. I was assuming annual compounding.

 

[jimrawr]

Well he states simple interest... so no interest on top of interest

 

[Jamestl]

I had forgotten what effective interest rate was, so here is what I found:

http://www.investorwords.com/cgi-bin/getword.cgi?1661&effective%20annual%20interest%20rate


I say the answer is 8% and it's just a trick question. Since it's annual with no compounding, you just pay interest on the principal. It's like a coupon bond.