Question

Calculate the nominal rate of interest if a $20,000 investment has experienced 40% increase in value after 6 years when interest compounds monthly

Answer 1

let i be monthly interest rate

Future Value = Present Value x (1+i)ⁿ

20000 x 140% = 20000 x (1+i)^(6x12)

Therefore,

1.40 = (1+i)⁷²

Therefore i = 1.40^(1/72) - 1

Therefore i = 1.0046842 - 1

Therefore i = 0.0046842

Therefore i = 0.46842% per month

Therefore nominal rate of interest = 5.6210% p.a. {0.46842% x12}