Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?
A)1.40 percent
B)5.45 percent
C)5.77 percent
D)40.00 percent

Question

Quizplus · Accepted Answer

Using the formula for compound interest, A = P (1 + r/n)^(nt), where A is the ending amount, P is the principal (starting amount), r is the interest rate, n is the number of times interest is compounded per year, and t is the time in years, we can solve for the interest rate:

$7,000 = $5,000 (1 + r/1)^(1*6)
7/5 = (1 + r)^6
(7/5)^(1/6) = 1 + r
r = (7/5)^(1/6) - 1
r ≈ 0.0577 or 5.77%

Therefore, the answer is choice C, 5.77 percent.

Solving for Rates What Annual Rate of Return Is Earned