Johnny invests $2,745 into an account, which has been earning interest for many years and he now has a total of $39,974. In two sentences explain why a negative number would be reasonable in the solution of the rate he received on his investment?

1 Answer
SCooke
Jun 22, 2018

The "effective" annual interest rate may need to be reported.
Rearranging the formula for compound interest to find the effective interest rate would invoke a "negative" number in the equation.

Explanation:

Rearranging the formula for compound interest to find the effective interest rate would invoke a "negative" number in the equation.

#r = ("FV" /"PV")^(1/n) - 1#

#r = (39974/2745)^(1/n) - 1#

#r = (14.562)^(1/n) - 1#

So, if the time lapse was 30 years, the rate would have been:
#r = (14.562)^(1/30) - 1 = 0.0932 # or #9.32%#

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