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A financial institution offers a "double-your-money" savings account in which you will have $2 in 4 years for every dollar you invest today. What stated annual interest rate (assuming semi-annual compounding) does this account offer?

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Zviko

Answer:

The stated annual interest rate offered by this account is 41.42%.

Explanation:

The stated annual interest rate, r on the saving account can be determined as follows :

Pv = - $1

n = 4 × 2= 8

pmt = $ 0

p/yr = 2

Fv = $4

r = ?

Using a financial calculator the nominal rate,r compounded semi-annual is 37.8414 %

Then use the financial calculator to convert norminal rate to annual rate as follows :

37.8414 % Shift NOM%

P/YR 2

Shift EFF% 41.4213 or 41.42%

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