Question

If RRSP contributions of $4830.02 at the end of every six months are projected to generate a plan worth $680,000 in 25 years, what nominal rate compounded semi-annually and effective rates of return were assumed in the forecast? (Do not round intermediate calculations and round your final answers to 2 decimal places.)

  I need the full steps including the graphical calcuation or any method,

Nominal rate of return	%
Effective rate of return	%

Answer 1

1.Information provided:

Future value= $680,000

Semi-annual contribution= $4,830.02

Time= 25 years*2= 50 semi-annual periods

The nominal rate of return is calculated by computing the yield to maturity.

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 680,000

PMT= -4,830.02

N= 50

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.7365

Therefore, the yield to maturity is 3.7365%*2= 7.4731% 7.47%.

2.Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.0747/2)^2 - 1

= 1.0761 - 1

= 0.0761*100

= 7.61%.

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