Question

You wish to put money into a savings account to earn enough to make a down payment on a house in 6 years.

If you have $4,000 to invest now (and nothing else) and you need $15,000 at the end of year 6 for the down payment, what interest rate would you need to earn?

Answer 1

Determination of interest rate

We know that Future value = Present value ( 1+i) ^n

Where i= Rate of interest and n = No of years

Here n= 6 years, Present value = $ 4000,

Future value = $ 15000

Future value = Present value ( 1+i) ^n

$ 15000= $ 4000( 1+I)^6

$ 15000/$ 4000= ( 1+i)^6

3.75 = ( 1+i)^6

3.75^1/6 = 1+i

3.75^0.1667 = 1+i

1.24644 = 1+i

1.24644-1 = i

i= 0.24644 or24.644%

Hence the interest rate is 24.644%

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