Question

A certificate of deposit for $100 is worth $125 after two year period with monthly compounding. What is the nominal annual interest rate?

	a.	9.1%
	b.	11.2%
	c.	12.5%
	d.	12.11%
	e.	3.02%

Answer 1

Formula :

FV = P(1 + i/n)nt

where FV = amount after n years(or Future value) = 125, P = initial value = 100, n = number of compoundings per year = 12(here we have compounded monthly) t = number of years = 2 and i = Nominal annual interest rate that we have to calculate

=> 125 = 100(1 + i/12)2*12 = 100(1 + i/12)24

=> i = ((125/100)1/24 - 1)*12 = 0.11209 = 11.2%(Rounded to one decimal place)

Thus, we have Annual interest rate = 11.2%

Hence, the correct answer is (b) 11.2%