Final Exam Study Guide Problem 8 Solution

This problem requires you to use the compound interest formula in Section 5.1.  In this problem, you need to solve for i by removing a power.

Problem 8 A soon to retire community college teacher wishes to have $15,000 for a motorcycle when he retires. He has $10,000 now and plans to retire in 5 years. What interest rate, compounded quarterly, will he need to earn (to the nearest tenth of a percent)? To earn full credit, you need to show the equation (see last page), all pertinent quantities and the steps you followed to solve the equation.

Solution Use final_study_guide_soln_08awith PV = 10000, FV = 15000 and n = 4∙5 and solve for i:

final_study_guide_soln_08b

This is approximately 0.0204 or 2.04% per period. The annual rate would be four times this (quarterly!) to give 8.2%.