What is the rate of return on an investment if you lend $1,000 and are repaid $1,254.70 two years later?
A)12%
B)25%
C)6%
D)18%
E)4%

Question

Quizplus · Accepted Answer

The rate of return can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate, and n is the time the money is invested for in years. Rearranging the formula to solve for r gives us r = [(A/P)^(1/n)] - 1. Substituting the given values (A = $1,254.70, P = $1,000, n = 2 years) gives us r = [(1254.70/1000)^(1/2)] - 1 = 0.12, or 12%.

What Is the Rate of Return on an Investment If