Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in eight years. If the interest is compounded monthly, what is the effective annual rate of return earned on the investment?
A)4.3%
B)5.7%
C)6.5%
D)7.3%
E)8.8%

Question

Quizplus · Accepted Answer

The effective annual rate of return can be calculated using the formula for the future value of an investment compounded monthly: $FV = PV(1 + \frac{r}{n})^{nt}$, where FV is the future value, PV is the present value, r is the annual interest rate, n is the number of compounding periods per year, and t is the time in years. Rearranging the formula to solve for r gives us the effective annual rate. Plugging in the values: $32,500 = 18,500(1 + \frac{r}{12})^{12*8}$. Solving for r requires iterative methods or a financial calculator, leading to an effective annual rate of approximately 7.3%.

Mike Is Considering Investing $18,500 in an Investment That Will