Question

Suppose you deposited $2,000 in a savings account. If you have $2,600 in the account after 4 years, what interest rate did you earn on your savings

Answer 1

Answer:

6.78% per year.

Explanation:

Assuming compounding occurs only once a year, the interest rate 'r' required on a $2,000 investment for 4 years to yield $2,600 is determined by:

$FV = PV*(1+r)^n\\2,600 = 2,000*(1+r)^4\\r=\sqrt[4]{\frac{2,600}{2,000}}-1\\ r=0.06779=6.78\%$

The interest rate earned on those savings was 6.78% per year.