What is the interest rate of a 6-year, annual $10,000 annuity with a present value of $40,000?
A) 11.94 percent
B) 12.24 percent
C) 12.98 percent
D) 13.12 percent

Question

Quizplus · Accepted Answer

The interest rate for an annuity can be found using the present value formula for annuities: $PV = PMT \times \left[\frac{1 - (1 + r)^{-n}}{r}\right]$, where PV is the present value, PMT is the annual payment, r is the interest rate per period, and n is the number of periods. Here, $PV = $40,000$, $PMT = $10,000$, and $n = 6$. Solving for r in this equation requires trial and error or financial calculator/computer software. The correct interest rate that fits this equation is approximately 12.98 percent, making option C correct.

What Is the Interest Rate of a 6-Year, Annual $10,000