2. Adam borrows $6,000 from his parents today for university fees and he promises to pay a lump sum of $6,900 in 3 years' time. Calculate the following quantities
for the repayment arrangement:
(a) the effective annual interest rate.
(b) the equivalent simple annual interest rate.

A) 4.77%.

B) 5%.

Step-by-step explanation:

Given that Adam borrows $ 6,000 from his parents today for university fees and he promises to pay a lump sum of $ 6,900 in 3 years' time, to calculate the effective annual interest rate and the equivalent simple annual interest rate the following calculations must be performed:

A)

6,900 = 6,000 x (1 + X / 1) ^ 3x1

6,900 = 6,000 x 1X ^ 3

6,900 = 6,000 x 1 x 4.77 ^ 3

Thus, the interest rate of said investment is 4.77% per year.

B)

(6,900 - 6,000) / 3 = 300

6,000 = 100

300 = X

300 x 100 / 6,000 = X

30000 / 6,000 = X

5 = X

Thus, the simple interest rate would be 5% per year.

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