Sajid invested $20 000 in strip bonds earning him $2536

Accounting Dec 01, 2020

Sajid invested $20 000 in strip bonds earning him $2536.50 in one year. What is the nominal annual rate of interest compounded monthly? Select one: A. 1% O B. 12.68% O C. 12% D. 4.19% O E. 2.05%

Expert Solution

C)12%

Explanation:

Annual Interest Rate(Compounded Anually)=2536.50/20000=12.6825%

We know that equivalent interest rate:

r = (1 + i/m)^m - 1

i=ROI

m=no. of compoundings

0.126825=(1+i/12)^12-1

(1+i/12)^12=0.126825+1

(1+i/12)^12=1.126825

(1+i/12)=(1.126825)^(1/12)

i/12=1.009999998-1

i/12=0.009999998

i=12*009999998

i=12%

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