Question

Five years ago, you put $20,000 into an interest-earning account. The interest rate is compounded monthly. Today your deposit is worth $30,000. What is the effective annual interest earned on the account? please show how to solve using finance calculator.

Answer 1

Present value= $20,000

Future value= $30,000

Time= 5 years*12= 60 months

The yield to maturity of the deposit is calculated with the help of a financial calculator.

The below has to be entered in a financial calculator:

PV= -20,000; FV= 30,000; N= 60

Press CPT and I/Y to calculate the yield to maturity

The yield to maturity is 0.6781/12= 0.0565 5.65%.

The 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+0.0565/12)^12-1

        = 1.0580-1

        = 0.0580*100= 5.80%.

The effective annual rate earned on the account is 5.80%.