Question

What is the simple interest rate on a $850 investment paying $300.56 interest in 13.6 years?

Answer 1

If it is a simple interest rate, it does not compound.

We can relate the present value PV and the future value FV as:

`\begin{gathered} FV=PV(1+n\cdot r)=PV+I \\ I=PV\cdot n\cdot r \\ r=(I)/(PV\cdot n) \end{gathered}`

r: annual interest rate.

I: interest ($ 300.56)

PV: present value or initial capital ($850)

n: number of periods (13.6 years)

Then, we can calculate r as:

`r=(I)/(PV\cdot n)=(300.56)/(850\cdot13.6)=(300.56)/(11560)=0.026`

The interest rate is r=0.026 or 2.6%.