Question

You are considering opening a savings account at a local bank, which seems to be offering a good rate on one of their accounts. The account would pay interest monthly. You work out that if you put $10,000 in this account, you would have $10,825 in your account at the end of the year. What would the advertised rate on this account be? (Round your answer to three decimal places)

	A.	2.785% per month
	B.	7.954 % p.a.
	C.	3.934% per month
	D.	3.740% p.a. compounding monthly
	E.	7.954% p.a. compounding monthly

Answer 1

The rate is computed as shown below:

Plug the below variables in the financial calculator as follows:

PV = - 10,000

FV = 10,825

N = 12

PMT = 0

Finally press CPT and then press I/Y. It will give I/Y equal to 0.66279668%.

Since the accounts pays interest monthly, we shall multiply the above rate by 12 as follows:

= 0.66279668% x 12

= 7.954% Approximately compounding monthly.

So, the correct answer is option E.

Feel free to ask in case of any query relating to this question