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Question

Find the equivalent rate of simple interest in order to yield the same return as an investment of $P at 5%p.a. compound interest over a 25 year period. Use positive index to give the exact value of the final answer in percentage.

Answer 1

1. Find the future value of $1 after 25 years at 5% annual compounding.
FV = $1(1.05)^25 = $3.39.
2. Subtract $1 from $3.39 to find the interest amount--$2.39.
3. Substitute into the simple interest formula I = PxRxT: $2.39 = $1 x R x 25. Solve for R.

R = 9.56%