For $10,000, you can purchase a five-year annuity that will pay $2,358.65 per year for five years. The payments occur at the beginning 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

We can use the formula for present value of an annuity to solve for the effective annual interest rate:

$10,000 = $2,358.65 * \frac{1 - (1+r)^{-5}}{r}

Using trial and error or a financial calculator, we find that the effective annual interest rate (rounded to the nearest whole percent) is approximately 9%. Therefore, the best choice is B.

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