Question

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the investment?

Answer 1

11.61%

Step-by-step explanation:

First, find the annual percentage return (APR) of this annuity. Using a financial calculator, input the following;

Recurring payment; PMT = -450

Future value ; FV = 27,000

Duration of investment ; N = 4*12 = 48 months

One -time present value; PV = 0

then compute interest rate; CPT I /Y= 0.92% (this is monthly rate)

APR = 0.92*12 = 11.035%

Effective Annual Rate (EAR) formula is as follows;

EAR = (1+
`(APR)/(m)` ) ^m -1

EAR = 1+
`(0.11035)/(12)` )^12 -1

EAR = 1.1161 -1

EAR = 0.1161 or 11.61%