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Question

# John buys a stereo system for 640 dollars. He agrees to pay 32 dollars a month for 2 years. Assuming that interest is compounded monthly, what interest rate is he paying?

Solution

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Recall: The present value $A_{p}$ of an annuity (the amount that must be invested now) where the annuity consists of

• $n$ periodical (equal) payments
• each payment of $R$ dollars
• with interest rate $i$ per time period

is

$A_{p}=R\frac{1-(1+i)^{-n}}{i}$

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