Question

I have $10,000 right now. I need $12,000 at the end of year 4. What interest rate must I receive to turn $10,000 into $12,000.

I have $10,000 right now. I need $12.000 at the end of year 4. What interest rate must I receive to turn $10,000 into $12.000

Answer 1

To understand the question we have to understand it analytically, If we deposit a sum of money with the present value PV in a bank that pays interest at the rate "r", then after one year it will become "PV(1 + r)". Let us call this amount its future value "FV".

FV = PV (1 + r)^_n

Now, let put this formula in our equation: -

$ 12,000 = $ 10,000 (1+r)⁴

(1+r)⁴= 12,000 / 10,000

(1+r)^{4 =} 1.2

1+r = (1.2)^1/4

r = 1.0466351393921056 - 1.0000

r = .0466351

Rate of Interest = 4.66351%