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Maggie deposits $10,000 today and is promised a return of $17,000 in eight years. What is the implied annual rate of return?
- a)6.86 percent
- b)7.06 percent
- c)5.99 percent
- d)6.07 percent
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Maggie deposits $10,000 today and is promised a return of $17,000 in e...
FV=PV(1+k)n
17,000=10,000(1+ k)8
8ln(1+k)=ln(1.7), therefore k=6.86%
Or using a financial calculator (TI BAII Plus),
N=8, PV= –10,000, PMT=0, FV=17,000, CPT I/Y=6.86%
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Maggie deposits $10,000 today and is promised a return of $17,000 in e...
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Maggie deposits $10,000 today and is promised a return of $17,000 in e...
Calculation of Implied Annual Rate of Return
- The formula for calculating the implied annual rate of return is as follows:
Implied annual rate of return = [(Future value / Present value) ^ (1/n)] - 1
Where,
Future value = $17,000
Present value = $10,000
n = 8 years
- Substituting the values in the above formula:
Implied annual rate of return = [(17,000 / 10,000) ^ (1/8)] - 1
= (1.7 ^ 0.125) - 1
= 0.0686 or 6.86%
- Therefore, the implied annual rate of return for Maggie is 6.86%.
Conclusion
- Maggie is promised a return of $17,000 in eight years for depositing $10,000 today.
- The implied annual rate of return for Maggie is 6.86%.
- The formula for calculating the implied annual rate of return is as follows:
Implied annual rate of return = [(Future value / Present value) ^ (1/n)] - 1
Where,
Future value = $17,000
Present value = $10,000
n = 8 years
- Substituting the values in the above formula:
Implied annual rate of return = [(17,000 / 10,000) ^ (1/8)] - 1
= (1.7 ^ 0.125) - 1
= 0.0686 or 6.86%
- Therefore, the implied annual rate of return for Maggie is 6.86%.
Conclusion
- Maggie is promised a return of $17,000 in eight years for depositing $10,000 today.
- The implied annual rate of return for Maggie is 6.86%.
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Maggie deposits $10,000 today and is promised a return of $17,000 in eight years. What is the implied annual rate of return?a)6.86 percentb)7.06 percentc)5.99 percentd)6.07 percentCorrect answer is option 'A'. Can you explain this answer?
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