Question

If you invest $2,500 today, an investment guarantees you will have $3,600 four years from today. What rate of interest will you earn?

Multiple Choice

a. 8.72 percent
b. 9.03 percent
c. 8.68 percent
d. 9.39 percent
e. 9.54 percent

Answer 1

To find the rate of interest, use the formula for compound interest: Future Value = Principal * (1 + Interest Rate)^Time. Plugging in the given values, the rate of interest is found to be 8.72 percent.

Step-by-step explanation:

To find the rate of interest, we can use the formula for compound interest:

Principal = $2,500

Future Value = $3,600

Time = 4 years

Interest Rate = ?

The formula for compound interest is:

Future Value = Principal * (1 + Interest Rate)^Time

Plugging in the given values, we have:

$3,600 = $2,500 * (1 + Interest Rate)^4

Simplifying the equation, we get:

(1 + Interest Rate)^4 = $3,600 / $2,500

Taking the fourth root of both sides, we get:

1 + Interest Rate = (∛($3,600 / $2,500))

Interest Rate = (∛($3,600 / $2,500)) - 1

Calculating the value, we find:

Interest Rate = 0.0872

So, the rate of interest is 8.72 percent (option a).