Question

Calculate the value of a $50,000 investment currently held in an investment fund that earns a nominal rate of 8% annually, compounded weekly, for 10 years.  What is the effective interest rate?

Answer 1

Information provided:

Present value= $50,000

Time= 10 years*52= 520 weeks

Interest rate= 8%/52= 0.1538% per week

The question is solved by computing the future value.

Enter the below in a financial calculator to compute the future value:

PV= -50,000

N= 520

I/Y= 0.1538

Press the CPT key and FV compute the future value.

The value obtained is 111,208.66.

Therefore, the value of the investment in 10 years is $111,208.66.

Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.08/52)^52-1

        = 1.0832 – 1

        = 1.0832 – 1

        = 0.0832*100

        = 8.32%.

       

Therefore, the effective annual rate is 8.32%.

In case of any query, kindly comment on the solution.