Question

In 2029, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2041. What annual rate of return will you earn over the last 12 years?

Answer 1

Answer:

Present face value (PV) =$1,000

Future face value (FV) = $2,000

Number of years (n) = 12 years

Interest rate = ?

FV = PV(1 + r)n

$2,000 = $1,000(1 + r)12

$2,000 = (1 + r)12  

$1,000

2 = (1 + r)12

12√2= 1 + r    

1.0595 = 1 + r

1.0595 - 1 = r

r = 0.0595

r = 5.95% = 6%                                                                          

Explanation:

In this case, we will apply the formula for future value of a lump sum, which equals present value multiplied by 1 plus interest rate raised to power number of years.  The future value, present value and number of years were provided with the exception of interest rate. Thus, interest rate is made the subject of the formula.