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Exercise
Nov 20'23
Current loan rates are based on the following term structure of interest rates:
Investment Length (years) | Spot Rate |
---|---|
1 | 5.00% |
2 | 5.25% |
3 | 5.75% |
4 | 6.25% |
5 | 7.25% |
A loan of 6000 is to be repaid with a single payment of principal plus interest at the end of five years. The borrower has two choices:
Calculate the annual effective interest rate on the 2-year loan such that the borrower is indifferent between the two choices.