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Edmund deposited $2,000 twice in his bank account on 1st January 2011 and on 1st January 2014
Edmund deposited $2,000 twice in his bank account on 1st January 2011 and on 1st January 2014. If there were no other deposits or withdrawals and the amount of money in the account at the end of 319 Decemeber 2015 is $7,100, find the effective rate of interest that Edmund earned.
Expert Solution
Future value = Deposit in 2011 * (1 + Effective interest rate)no of periods + Deposit in 2014 * (1 + Effective interest rate)no of periods
7100 = $2000 * (1 + Effective interest rate)5 + $2000 * (1 + Effective interest rate)2
Using Texas Instruments BA 2 plus calculator
Press CF, CFo = -2000 Press ENTER
C01 = 0, Press ENTER, F01 = 1 Press ENTER
C02 = 0, Press ENTER, F02 = 1 Press ENTER
C03 = -2000, Press ENTER, F03 = 1 Press ENTER
C04 = 0, Press ENTER, F04 = 1 Press ENTER
C05 = 7100, Press ENTER, F05 = 1 Press ENTER
Press IRR, CPT --> IRR = 16.9030
Effective Interest rate = 16.9030%
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