1. Find Interest Rate i = ?
Present value C = 1000, Time n = 3 Year, Future value FV = 1331,
Interest compounded = Year (1/year)
for Future value using Compound Interest method
Solution:
`C=1000`
`n=3` years (Number of periods)
`FV=1331` (Future value)
Now, Future value (Compound Interest) formula is
`FV=C*(1+i)^n`
`:.1331=1000*(1+i)^3`
`:.(1331)/(1000)=(1+i)^3`
`:.(1+i)^3=1.33`
`:.(1+i)=1.33^(1/3)`
`:.(1+i)=1.1`
`:.i=1.1-1`
`:.i=0.1`
`:.i=10 %` per year
2. Find Interest Rate i = ?
Present value C = 5000, Time n = 2 Year, Future value FV = 6050,
Interest compounded = Year (1/year)
for Future value using Compound Interest method
Solution:
`C=5000`
`n=2` years (Number of periods)
`FV=6050` (Future value)
Now, Future value (Compound Interest) formula is
`FV=C*(1+i)^n`
`:.6050=5000*(1+i)^2`
`:.(6050)/(5000)=(1+i)^2`
`:.(1+i)^2=1.21`
`:.(1+i)=1.21^(1/2)`
`:.(1+i)=1.1`
`:.i=1.1-1`
`:.i=0.1`
`:.i=10 %` per year
This material is intended as a summary. Use your textbook for detail explanation.
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