The television commercial pitchman tells you he can double your money with a risk-free investment in just 10 years
If this is true, what interest rate must this risk-free investment earn on an annual basis? Solve this question using the Rule of 72 and then in a more exact fashion using a formula, your calculator, or computer. In today's rate environment, is the interest rate that you solved for a realistic annual rate of return for a risk-free investment?
What will be an ideal response?
Answer: Your 10-year risk-free investment would have to earn about 7.20% per year via the Rule of
72, where the rate is determined by dividing 72 by the time period or years = 7.20%. A more exact result is found via the formula r = (FV/PV)1/n - 1 = ($2/$1)1/10 - 1 = 7.18%. As this problem is written, 10-year treasury bonds are yielding close to 2.25%, so an annual rate of 7.20% on a risk-free investment is not very likely. However, the correct answer to this portion of the question will depend on current economic conditions.
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