Question

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

Answer 1

Answer:

The current interest rate is 6%

Explanation:

Given that:

• Balance: $800
• Future value: $898.88
• n= 2 years

We have formula for future value as below:

FV = PV$(1+r)^{n}$

<=> $(1+r)^{n}$ = $\frac{FV}{PV}$

<=> $(1+r)^{2}$ = $\frac{898.88}{800}$

<=> $(1+r)^{n}$ = 1.1236

<=> 1+ r = $\sqrt{1.1236}$ = 1.06

<=> r = 1.06 -1 = 6%

So the current interest rate is 6%