Calculation of the implied annual rate of return:
It is given that a $2,500 loan shall be taken next year when $4,500 must be repaid in year 5. It means the loan duration is 4 years and interest amount is (4500-2500) =2000
$2,000 is interest for 4 years so interest for one year shall be 2000/4 = $500
So the annual rate of return shall be calculated as follows:
Annual Interest rate = Annual Interest / Principal amount = 500/2500 = 0.20 = 20%
