Question

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the investment?
a. 13.6%
b. 22.3%
c. 11.6%
d. 15.1%
e. 11.1%

Answer 1

Answer:

11.6(approx)

Explanation:

Given:

Per month Payment(PMT) = $450

Total receive money(FV) = $27,000

Number of payment(NPER) = 12 x 4 years = 48

Effective rate of return:

Computation or interest rate:

In excel

=RATE(NPER;-PMT; ;FV)

=RATE(48;-450; ;27000)

= 0.92

Annual interest rate = 12 x 0.92

= 11.04%

Effective rate of return = $[1+\frac{i}{n} ]^n-1$

$[1+\frac{0.1104}{48} ]^{48}-1$

$[1.0023]^{48}-1\\1.11658-1\\0.1165$

Therefore, Effective rate of return is 11.6% (approx)