The following instalment payment schedule is for a long-term bank loan payable:

Question

The following instalment payment schedule is for a long-term bank loan payable:

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Assuming payments are made annually, what is the interest rate on the bank loan? (Round answer to the nearest whole percent, e.g. 12%.)

Interest Period Cash Payment Interest Expense Reduction of Principal Principal Balance Issue date $115,000.00 1 $27,300.59 $6,900.00 $20,400.59 94,599.41 2 27,300.59 5,675.96 21,624.63 72,974.78 3 27,300.59 4,378.49 22,922.10 50,052.68 4 27,300.59 3,003.16 24,297.43 25,755.25 5 27,300.59 1,545.34 25,755.25

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Explanation / Answer

Interest rate on the bank loan = Interest Expense/Beginning principal Balance It can be calculated as folllows: Year Interest Expense Beginning Principal Balance Interest rate a b a/b 1 $ 6,900.00 $ 1,15,000.00 6% 2 $ 5,675.96 $     94,599.41 6% 3 $ 4,378.49 $     72,974.78 6% 4 $ 3,003.16 $     50,052.68 6% 5 $ 1,545.34 $     25,755.25 6% Thus, Interest rate 6%

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