Question

Betty and Bob invest $5000 in an account for 8 years which results in a terminal account balance of $12,000. Your final answers should be correct to 3 places after the decimal point.

1. Find their simple per annum rate of return.
2. Find their effective rate of return.
3. Find their per annum continuous rate of return.

Answer 1

a

12,000 = 5,000(1 + r(8))

Simmple Rate of Return = 17.50%

b.

12,000 = 5,000(1 + r)8

EAR = 11.56%

c.

12,000 = (5,000)er8

Using Log,

log(12,000/5,000) - 8rlog(e)

r = 10.94%