Find the effective annual rate of interest (as a %, 2 decimal places) at which an...

Find the effective annual rate of interest (as a %, 2 decimal places) at which an amount of $2,000 today will accumulate to $4900 in 8 years.

(Solve using excel =RATE function; Answer in percentage rounded to two decimals without the % sign e.g. 1.8891 is 1.89)

Solutions

Expert Solution

The question demands me to use the RATE function in excel to solve the question which I have done.

The key here is to take the Initial Investment which is Present Value to be negative as it is a cash outflow.

The Answer is 11.85% and how I have used the formula has also been showcased.

Starting Amount	($2,000)
Future Value	$4,900
Number of Periods	8
The effective annual rate of interest	11.85%

RATE Formula in Excel (nper, pmt, pv, [fv], [type], [guess])
nper - The total number of payment periods =	8
pmt - The payment made each period =	0
pv - The present value (Which needs to be negative as it as outflow)	$ (2,000)
fv - [optional] is the future value	$ 4,900
type - [optional] When payments are due. 0 = end of period. 1 = beginning of period. Default is 0	0
guess - [optional] Your guess on the rate. Default is 10%	0

jeff jeffy answered 1 year ago

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