What monthly compounded nominal rate of return must Rachel earn in her RRSP in order for month-end contributions of $600 to accumulate to $750,000 in 25 years?

Question

Quizplus · Accepted Answer

To find the monthly compounded nominal rate of return, we can use the future value of an annuity formula: $FV = P \times \frac{(1 + r)^n - 1}{r}$, where $FV$ is the future value, $P$ is the payment amount, $r$ is the monthly interest rate, and $n$ is the total number of payments. Given $FV = 750,000$, $P = 600$, and $n = 25 \times 12 = 300$, we solve for $r$. This is a financial calculation that typically requires a financial calculator or software to solve directly for $r$. The correct answer, 9.65%, indicates the nominal rate of return, compounded monthly, that would allow Rachel's $600 monthly contributions to grow to $750,000 over 25 years.

What Monthly Compounded Nominal Rate of Return Must Rachel Earn