Percentage question/10 easy points for those who can do math!!!?

Question

I have one percentage left to do for my graduate finance class. It is probably the simpelst thing, but I am not sure if I got the correct answer. Here is the problem: Rishi Singh has $1500 to invest. His investment counselor suggests aninvestement that pays no interest but will return $2000 at the end of 3years. a. What annual rate of return will Rishi earn with this investment? I took the $500 he earned and divided it by 3, then divided that by 36 months to get 4.63. Is this correct???

Answer 1

the annual rate is 10.1%

$1500 will get you $151.50 after one year

$1500 plus the $151.50 is $1651.50

$1651.50 will get $166.80 in the second year.

$1651.50 plus the $166.80 is $1818.30

$1818.30 will get you $183.65 in the 3rd year

add all the intrest together and you get $501.95

add the orginal $1500 plus the $501.95 and you have $2001.95

This is my fuzzy math

Bill

Answer 2

I'm no math wiz but that doesn't sound right.  $2000 is 1.33 times $1500 so the total rerturn over 3 years is 33%.  Divide by three to annualize and you get 11% annual return.

Answer 3

let a = annual interest rate

2000 = 1500 ( 1 + a)^ 3

a = 0.1006/10.06%

Answer 4

yup sounds correct

Answer 5

Divided  by  3   and  then  by  36   ?

Whoops   .    .    .

Divided  by  3  would  give  an  approx  of  the  year  amount  

(except  for  compounding )

But  why  36  ?

Do   not   you  need   to  divide   the  yearly  $$$   by  the  investment $$$$   amount  to  get  a  %  ?

What   does  36   have   do   do  with  it   ?

Also ,  most  interest  would  have  been  compounded  monthly  or  annually  at  the  worst .

Did   you  factor    in  compounding  ?

But ,  if   there  is  No  compounding  and  the  $2k  Is  the  total   amount  returned   then ,

the  ( $500 /  3 )  /  $1500   =   11.11%   annual  rate

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Answer 6

The answer is (2,000/1,500)^(1/3) or 1.10063

Subtract 1 and you've got 10.063%

That's if it's amortized yearly but most interest is amortized monthly so do this:

(2000/1500)^(1/36)=1.008023.

Subtract 1 and multiply by 12 and you've got 9.628% if amortized monthly.