What EAR is being earned on a deposit of $5,000 made ten years ago today if the deposit is worth $9,948.94 today? The deposit pays interest semi-annually.
A)3.56 percent
B)6.76 percent
C)7.00 percent
D)7.12 percent $9,948.94 = $5,000

Question

Quizplus · Accepted Answer

To solve the problem, we will use the formula for EAR (Effective Annual Rate) and solve for r:

$9,948.94 = $5,000*(1 + r/2)^(2*10)
(1 + r/2)^20 = 1.989788
1 + r/2 = (1.989788)^(1/20)
r/2 = 0.035987
r = 0.071974 or 7.1974%

So the EAR earned on the deposit is 7.1974%, which is closest to choice C, 7.00%.

What EAR Is Being Earned on a Deposit of $5,000