Question

Eight years ago, you gave Laura $1000 in exchange for her promise to give you $4021 today. What compound annual rate of return was Laura promising? unfortunately, today Laura told you that she can only give you $700. If you get $700 today, what compound annual rate of return will you earn over the eight year period?

Answer 1

(1)What Laura promised to pay
Beginning Value	$1,000
Ending Value (as promised)	$4,021
Compound Annual Rate of Return (see note)	18.99% or 19%
(2)What Laura actually paid
Beginning Value	$1,000
Ending Value (actually paid)	$700
Compound Annual Rate of Return (see note)	-4.36%

Note:

Compound Annual Rate of Return :

where n stands Number of Compounding Years

For Case 1, Compound Annual Rate of Return : ( n = 8 years )

= 18.99% or 19% (Approx.)

For Case 2, Compound Annual Rate of Return : ( n = 8 years )

or, -4.36% (Approx.)