A woman made 7 annual end-of-year purchases of $3500 worth of common stock. The stock paid...
A woman made 7 annual end-of-year purchases of $3500 worth of common stock. The stock paid no dividends. Then after holding the stock for 8 years, she sold all the stock for $38,000. What interest rate did her investment earn?
Homework Answers
Answer:
Here, A = 3,500
FV = 38,000
n = 8 years
FV = A(F/A, i, n)
38,000 = 3,500(F/A, i, 8)
(F/A, i, 8) = 38000 / 3,500 = 10.86
From the interest table we find the value of (F/A, i, 8) at i = 8%, is 10.6366 and at i = 9%, it is 11.0285
By interpolation
i = 8% + [(10.6366 - 10.86) / (10.6366 - 11.0285)] * (9% - 8%)
= 0.08 + (-0.2234/ -0.3919) * 0.01
= 0.0857 or 8.57%
Thus, her investment earns an interest of 8.57%.
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