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At what rate, compounded monthly should P25,000 be deposited in a bank to gain an interest of P4,500 in 3 years?
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It is one of the typical problems on periodically compounded account,
but slightly changed/modified comparing with traditional formulation.
So, my first step is to convert the problem to its traditional form.
To convert it, notice that having the principal of P25,000 and gaining the interest of P4,500
MEANS that the Future Value is P25,000 + P4,500 = P29,500.
So, now we have this traditional formulation
+----------------------------------------------------------------+
| Find the nominal annual rate at which the principal P25,000 |
| compounded monthly becomes P29,500 in 3 years ? |
+----------------------------------------------------------------+
Now this standard problem is EASY to SOLVE.
29500 =
=
= 1.18
= = 0.001997
= = 1.004609.
= 1.004609 - 1 = 0.004609
r = 12*0.004609 = 0.055308 = 0.055 (rounded) = 5.5%. ANSWER
CHECK. = 29500.84. Good enough.
Solved.