1.) Use the \"rule of 72\" to estimate the doubling time (in years) for the inte
ID: 3029647 • Letter: 1
Question
1.) Use the "rule of 72" to estimate the doubling time (in years) for the interest rate, and then calculate it exactly. (Round your answers to two decimal places.) 3% compounded annually. "rule of 72" _____yr exact answer _____yr
2.) Find the effective rate of the compound interest rate or investment. (Round your answer to two decimal places.) 19% compounded monthly. [Note: This rate is a typical credit card interest rate, often stated as 1.6% per month.] %_______
3.) You have just received $115,000 from the estate of a long-lost rich uncle. If you invest all your inheritance in a tax-free bond fund earning 6.6% compounded quarterly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.) _______yr
4.) You have just won $170,000 from a lottery. If you invest all this amount in a tax-free money market fund earning 7% compounded weekly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.) _______yr
Explanation / Answer
1) according to the rule of 72 formula
years to double = 72 / interest rate
years = 72 / 3 = 24 years
2) effective rate of interest rate = nominal rate / n
n = number of periods per year
for compunded monthly n = 12
therefore, effective rate of interest = 19% / 12 = .19 / 12 = .0158
effective rate of interest = .0158* 100 = 1.58 = 1.6%
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