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30 September, 21:08

Your brother, who is prone to bearing substantial risk, suggests that you buy a security for $10,000 that promises to pay you $100,000 at the end of 15 years. What is the implied annual return or yield on this investment

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  1. 30 September, 21:36
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    16.59%

    Explanation:

    First we look at the formula which to determine the future value of the security and then work back to determine the annual return in terms of percentage

    Future Value = Present Value x (1 + i) ∧n

    where i = the annual rate of return

    n = number of years or period

    We then plug the given figures into the equation as follows

    we already know Present value to be $10,000 and the future value to be $100,000 and the number of years to be 15

    Therefore, the implied annual return or yield on the investment is

    100,000 = 10,000 x (1+i) ∧15

    (1+i) ∧15 = 100,000/10,000 = 10

    1 + i = (10∧ (1/15)) = 1.165914

    i = 1.165914-1

    = 0.1659

    = 16.59%
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