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Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the investment?

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beritop1089

Answer:

11.61%

Explanation:

First, find the annual percentage return (APR) of this annuity. Using a financial calculator, input the following;

Recurring payment; PMT = -450

Future value ; FV = 27,000

Duration of investment ; N = 4*12 = 48 months

One -time present value; PV = 0

then compute interest rate; CPT I /Y= 0.92% (this is monthly rate)

APR = 0.92*12 = 11.035%

Effective Annual Rate (EAR) formula is as follows;

EAR = (1+[tex]\frac{APR}{m}[/tex] ) ^m  -1

EAR = 1+[tex]\frac{0.11035}{12}[/tex] )^12 -1

EAR = 1.1161 -1

EAR = 0.1161 or 11.61%

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