Question

The future value and present value equations also help in finding the interest rate and the number of years that correspond to present and future value calculations. If a security of $6,000 will be worth $7,300 five years in the future, assuming that no additional deposits or withdrawals are made, what is the implied interest rate the investor will earn on the security?

Answer 1

4%

Step-by-step explanation:

Solution:

Calculation for the the implied interest rate the investor will earn on the security

Using this formula

Future value = Present Value (1+r)^t

Where,

Future value =$7,300

present value = $6,000

t= period = 5 years

r= interest implied = ??

Let plug in the formula

Future value = Present Value (1+r)^t

$7,300 = $6,000 (1+ r)^5

1+ r = ($7,300/$6,000 )^(1/5)

1+ r = 1.216666666^(1/5)

1+ r = 1.04

r= 1.04-1

r= 0.04*100

r= 4%

Therefore the implied interest rate the investor will earn on the security will be 4%