Suppose an investment broker offers to sell you a financial asset for $850. You will receive only one payment of $1,000 five years from now. What interest rate would you earn if you bought the financial asset at the offer price

The interest rate is 0.06%

Explanation:

Step one:

Given data

final amount $1,000

initial principal balance $850

annual interest rate=?

time (in years) = 5 years

Step two:

Applying the

Simple interest/Formula

A = P (1 + rt)

A = final amount

P = initial principal balance

r = annual interest rate

t = time (in years)

Plugin our data into the formula We have

1000=850 (1+r*5)

1,000=850 (1+5r)

Opening bracket we have

1,000=850+4,250r

Colleting like terms we have

1000-850=4250r

250=4,250r

Dividing both sides by 4,250 we have

r=250/4250

r=0.058

Hence the interest rate is 0.06%

0.035%

Explanation:

Using the formula for calculating simple interest.

Simple interest = Principal * Rate * Time/100

Since Amount = Principal + Interest

Interest = Amount - Principal

Interest = $1000 - $850

Interest = $150

If time = 5years

Principal = $850

To get the interest rate, we will substitute the given data into the simple interest formula to have;

$150 = ($850*Rate*5) / 100

Cross multiplying

$15,000 = 425000*rate

Interest Rate = 15000/425000

Interest rate = 0.035%