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Yield Rates- Kellison Chapter 5.4 #11

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  • Yield Rates- Kellison Chapter 5.4 #11

    Hi, the question reads as follows: "A loan of $10,000 is being repaid with payments of $1000 at the end of each year for 20 years. If each payment is immediately reinvested at 5% effective, find the effective annual rate of interest earned over the 20-year period." I tried to work this problem out using accumulated values, but I am at a dead-end, does anyone have any advice? The answer is 6.16%

  • #2
    Originally posted by CalloftheBlade
    Hi, the question reads as follows: "A loan of $10,000 is being repaid with payments of $1000 at the end of each year for 20 years. If each payment is immediately reinvested at 5% effective, find the effective annual rate of interest earned over the 20-year period." I tried to work this problem out using accumulated values, but I am at a dead-end, does anyone have any advice? The answer is 6.16%
    The accumulated value of $1,000/year for 20 years is 33,065.95.

    10,000(1+i)^20 = 33,065.95

    Solve for i.

    Arnold

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    • #3
      Originally posted by Arnold Kim
      The accumulated value of $1,000/year for 20 years is 33,065.95.

      10,000(1+i)^20 = 33,065.95

      Solve for i.

      Arnold
      Although I understand how you got 33,065.95 (annuity of 1000 for n=20, j=.05), can you explain why the formula n+ i(Is)n-1|j is not used in this problem? I don't quite understand the difference between effective annual rate of interest vs the immediate reinvestment...

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