Question

Biff deposited $9,000 in a bank account, and 12 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 12 years? I'm unsure how to input the problem in excel. I believe I have to 18000/9000 but if I need to find the rate, and n=12 I'm unsure what to input for FV and PV

Answer 1

FV = PV (1 + r)^n

Where,

Maturity value (FV) = $18000

Present value (PV) = $9000

Time (n) = 121.059463 = (1 + i)

Let's put all the values in the formula to solve for interest rate (i)

18000 = 9000 (1 + i) ^12

18000/ 9000 = (1 + i) ^12

2 = (1 + i) ^12

12?2 = (1 + i)                                                  {Taking 12th root of 2}

1.059463 = (1 + i)

i = 1.059463 - 1

i = 0.05946

So interest rate is 0.0595 or 5.95%

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We can calculate value of i using excel, the formula used is IRR

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Hope that helps.

Feel free to comment if you need further assistance J