Finding implicit interest rates (truth-in-lending laws reduce the type of deception suggested by this problem) Friendly Loan Company advertises that it is willing to lend cash for five years at the low rate of 8% per year. A potential borrower discovers that a 5-year, $10,000 loan requires that the borrower pay the 8% interest in advance, with interest deducted from the loan proceeds The borrower will collect $6,000 [=$10,000 — (5 X 0.08 X $10,000)) in cash and must repay the “$10,000” loan in five annual installments of $2,000, one each at the end of the next 5 years. Compute the effective interest rate implied by these loan terms

Required:

Using future value and present value techniques, including perpetuities to solve a variety of realistic problems, we give no hints as to the specific calculation with the problems.