Answer :
For the given principal amount $5,400 borrowed by a farmer from the bank at the rate of interest 7.36% compounded annually for the time period of 1 year then the amount of interest paid to the bank is equal to $397.44 and the effective interest rate is equal to 7.36%.
As given in the question,
Principal amount borrowed by a farmer from the bank 'P' = $5,400
Rate of interest compounded annually 'r' = 7.36%
Time period 'n' = 1 year
Amount = P [ 1 + (r/100) ]ⁿ
= 5400 [ 1 + (7.36/100) ]¹
= 5400 [ (100 + 7.36)/100]
= 54 × 107.36
= 5797.44
Amount of Interest paid to the bank = Amount - Principal amount
= 5797.44 - 5400
= $397.44
x = number of times compounding occurs in one year.
Here 'x' = 1
Effective Interest rate = [ 1 + (r/x) ]ˣ -1
= [ 1 + ( 7.36%/1)]¹ -1
= 1 + 7.36% - 1
= 7.36%
Therefore, for the given principal amount $5,400 borrowed by a farmer from the bank at the rate of interest 7.36% compounded annually for the time period of 1 year then the amount of interest paid to the bank is equal to $397.44 and the effective interest rate is equal to 7.36%.
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