SOLUTION: 1) If you have $7.00 now and $8.10 in 3 years, what is the Effective Annual Interest Rate? 2) If you have $9.00 now and $11.84 in 7 years, what is the Effective Annual Interes

Question 91820: 1) If you have $7.00 now and $8.10 in 3 years, what is the Effective Annual Interest Rate?
2) If you have $9.00 now and $11.84 in 7 years, what is the Effective Annual Interest Rate?
Answer by mathispowerful(115) (Show Source): You can put this solution on YOUR website!
This is a compounded interest problem.
Let's look at the formula first:
The total account value in a compounded interest account is given by

where A is total amount including the principle and interest,
p is principle, i is interest rate for one compounding period,
n is the number of compounding period.
For example, if the annual interest rate is 10%, and the account is compounded
quarterly for 3 years, then i = 2.5%, and n = 12.
The following is the answer:
1> in this case, p = 7, A = 8.1, n = 3. (compounded annually) question is i = ?
use the formula: 8.1 =

= 1.15714
then 1 + i = 1.04985 (third root of 1.15714)
then i = 0.04985 = 4.985% or 5%
2> this can be solved using same procedure
the answer is: 4%
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