Over six years Craig earned interest of $8,400 on an investment of $20,000. What effective rate of return did he earn?
A) 15.56%
B) 6.02%
C) 7.00%
D) 11.53%
E) 14.71%

Question

Quizplus · Accepted Answer

The effective rate of return can be calculated by dividing the total interest earned by the total amount invested and then dividing by the number of years. So, $8,400 / $20,000 = 0.42 over 6 years gives an annual rate of 0.42 / 6 = 0.07 or 7%. However, since the question asks for the effective rate of return, we need to consider the annual rate in terms of percentage, which is 7%. The mistake in the calculation was not converting the annual rate correctly to a percentage. The correct calculation should involve finding the rate that matches the given interest over the investment period, which requires a more detailed analysis considering the compound interest formula or an approximation method if the interest is compounded annually. Given the options and the total interest earned over the period, the correct effective rate of return is closer to 6.02% when considering the time value of money and the effect of compounding, if any, over the six years.

Over Six Years Craig Earned Interest of $8,400 on an Investment