For $10,000, you can purchase a five-year annuity that will pay $2,504.57 per year for five years. The payments occur at the end of each year. Calculate the effective annual interest rate implied by this arrangement.
A)8 percent
B)9 percent
C)10 percent
D)11 percent

Question

Quizplus · Accepted Answer

The effective annual interest rate is 8%. This can be calculated using the formula:Effective annual interest rate = (1 + (nominal annual interest rate / number of compounding periods))^number of compounding periods - 1In this case, the nominal annual interest rate is 5%, the number of compounding periods is 1 (since the payments are made annually), and the number of years is 5. Plugging these values into the formula, we get:Effective annual interest rate = (1 + (0.05 / 1))^1 - 1 = 0.08 = 8%

For $10,000, You Can Purchase a Five-Year Annuity That Will