Find the annual rate of discount if the annual rate of interest is 20%. How much interest should be paid in advance for the use of £1, 000 over a period of one year?
Find the annual rate of discount if the annual rate of interest is 20%. How much interest should be paid in advance for the use of £1, 000 over a period of one year?
Tags: rate of interest
This entry was posted on August 22, 2010, 3:06 pm and is filed under Discount Blog. You can follow any responses to this entry through RSS 2.0. Both comments and pings are currently closed.
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#1 by Nick S on August 22, 2010 - 3:06 pm
You’re going to pay x now (in pre-interest) and receive £1,000 now. Then you’re going to pay back the £1,000 a year from now.
Working in present value, we have
1000-x = 1000/(1+i); the last term is the £1,000 discounted a year.
Thus x = 1000( 1 – 1/(1+i)) = 1000i/(1+i) = (1000)(0.2)/1.2
= 1000/6 = £166.67.