Question

You invest $1,000 now, at an annual simple interest rate of 6%. What is the effective rate of interest in the fifth year of your investment

Answer 1

The effective rate of interest in the fifth year is 6.15%

Step-by-step explanation:

Mathematically, the effective rate of interest can be calculated as follows;

Reff = (1 + r/y)^y - 1

where;

r is the interest rate = 6% = 6/100 = 0.06

y is the period = 5 years

Substituting these values;

Reff = (1 + 0.06/5)^5 - 1

Reff = (1 + 0.012)^5 - 1

Reff = 1.012^5 - 1

Reff = 1.061457 - 1

Reff = 0.0615 which is 6.15%