Question

You made an investment of $8,000 into an account that paid you an annual interest rate of 3.1 percent for the first 5 years and 7.5 percent for the next 10 years. What was your annual rate of return over the entire 15 years?

Answer 1

Interest Rate for first 5 years = 3.10%
Interest Rate for next 10 years = 7.50%

(1 + Interest Rate for entire 15 years)^15 = (1 + Interest Rate for first 5 years)^5 * (1 + Interest Rate for next 10 years)^10
(1 + Interest Rate for entire 15 years)^15 = (1 + 0.0310)^5 * (1 + 0.0750)^10
(1 + Interest Rate for entire 15 years)^15 = 2.40092155
1 + Interest Rate for entire 15 years = 1.0601
Interest Rate for entire 15 years = 0.0601 or 6.01%

Therefore, your annual rate of return over the entire 15 years is 6.01%