Financial Formula

Question

An account that ' s compounded bi - weekly starts with $2500 and grows to $3000 in 3 years. Find the
annual interest rate

Answer 1

The interest rate is computed by the following:

 

        n th root of (FV/PV)-1

 

       Here, because of the bi-weekly, we adjust to the root being:  26*3 = 78

 

         So, we take the 78th root of  (3000/2500), then subtract 1 from it

 

        This gives us:  0.00234018984, which, if multiplied by 26 for interest periods in a year, then by 100, to get the percentage, gives us:  6.084463574 APR

 

        To test this, we plug in, to get:  3,000 = 2,500 * (1+0.00234018984)⁷⁸    

 

          This gives us:  3,000 = 3,000

 

        So, our APR checks out.