Suppose that at the end of each month you save $1,500, for three years, and at the end of the...

Question:

Suppose that at the end of each month you save $1,500, for three years, and at the end of the three years, you will have $60,000.

What is the annual interest rate if the interest is composed monthly?

A. 0.59%

B. 2.48%

C. 7.12%

D. 50.16%

Annuity:

An annuity is featured by a series of cash flows within a fixed term. The concept of an annuity could guide an investor for a savings plan with a given future value of savings. In practice, a term loan represents the concept of an annuity as well.

Answer and Explanation: 1

The answer is C. 7.12%

Given information:

  • Monthly savings = $1,500
  • N = 12 x 3 = 36
  • FV = $60,000

Estimate the monthly interest rate by using financial calculator:

  • N = 36
  • PMT = 1,500
  • FV = 60,000
  • CPT I = 0.59304%
  • APR = 0.59304% x 12 = 7.12%

Learn more about this topic:

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What is Annuity? - Definition & Formula

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Chapter 2 / Lesson 7
22K

Learn about annuities. Understand what an annuity is, examine the annuity formula and learn how to calculate its future value, and see examples of annuities.


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