Interest Rate - Time value of money question
You invest $900 today and receive a $100 coupon payment at the end of every year for 5 years. In addition, you receive $1,000 at the end of year 5. What is the interest rate?
PV = -900
FV = 1,000
N = 5
PMT = 100
CPT I –> I = 12.83%
My question is, what does the 12.83% represent here? Intutively, when the calculator solved for 12.83%, is it finding the rate that takes $900 at t = 0, pmts in years 1 to 5, and then calculates 12.83% on what basis?
Had I seen this problem on the exam, I would have probably known how to solve it, but I cannot guarantee that I would know how to interpret it and that is one of my concerns. Any help would be appreciated to put this answer into simple layman terms, or even if you would like to prove it mathematically.
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