What would the interest rate need to be in order to earn $100 on an investment of $1,000 over two years? Assume interest compounds annually.
What will be an ideal response?
Start with the expression 1,100 = 1,000(1 + R)2 and solve for r using the quadratic formula:
1,100 = 1,000(1 + R + R + R2)
1.1 = R2 + 2R + 1
0 = R2 + 2R - 0.1
R = 4.9%
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