Question

John invested $10,000 into a money market account and took out $2,000 at the end of year 1. He found out at the end of 7 years that the rest of the money in the account grew to a sum of $29,860. What is the annual interest rate John earned in this investment

Answer 1

Answer: 20%

Explanation:

The annual interest rate that John earned in this investment will be calculated thus:

At the annual interest rate, the money that's invested will be equal to the money that's earned. Therefore,

10000 = 2000/[1+20%]¹ + 29860/[1+20%]^7

10000 = 2000/(1+0.2)¹ + 29860/(1+0.2)^7

10000 = 1666.67 + 8333.33

10000 = 10000

Therefore, the annual interest rate John earned in this investment is 20%.