Question

You just paid $1,020 for a security that claims it will pay you $2,000 in 8 years. What is your annual rate of return?

Answer 1

Answer:

The annual interest rate is 8.78 per cent.

Explanation:

The amount paid for security (PV) = $1020

The amount paid in 8 years (FV)  = $2000

We have to find the rate of return.

Now, assume i% is the annual interest rate.

Present Value (PV) * (1+i)^n = Future Value (FV)  

Future Value (FV)  = $ 2,000

Present Value (PV) = $ 1,020

N= 8 years

1,020*(1+i)^8 = 2,000

i = (2,000/1,020)^(1/8) – 1

i = 0.0878 or 8.78%