Math Problem Statement
Use graphical approximation techniques or an equation solver to approximate the desired interest rate. A person makes annual payments of $1000 into an ordinary annuity. At the end of 5 years, the amount in the annuity is $5701.60. What annual nominal compounding rate has this annuity earned? Round to 2 decimal places
Solution
To determine the annual nominal compounding interest rate , we can use the future value formula for an ordinary annuity:
Where:
- is the future value of the annuity (in this case, $5701.60),
- is the annual payment (in this case, $1000),
- is the annual nominal interest rate (which we want to find),
- is the number of years (in this case, 5 years).
We are given:
- ,
- ,
- .
Thus, the equation becomes:
To solve for , we can either use graphical approximation techniques or an equation solver.
Let me calculate the value of .The annual nominal compounding interest rate that the annuity has earned is approximately 6.57%.
Would you like further details or explanations? Here are some related questions to expand on this concept:
- How does changing the number of years affect the annuity's future value?
- What if the payments were made at the beginning of each year (an annuity due)?
- How would this formula change if the compounding was monthly instead of annually?
- What happens to the interest rate if the future value were higher?
- How can you manually calculate interest rates for more complex annuities?
Tip: When solving annuity problems, always ensure that the payment period and compounding frequency align.
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Math Problem Analysis
Mathematical Concepts
Algebra
Financial Mathematics
Annuities
Interest Rates
Formulas
Future value of an ordinary annuity formula: FV = P * ((1 + r)^n - 1) / r
Theorems
Ordinary Annuity Theorem
Compound Interest Theorem
Suitable Grade Level
Grades 11-12, College Introductory Level
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