# if a $5000 investment earns interest of $500 in one year, what is its rate of return?

Compound interest is the interest paid on both principal and interest, compounded in regular intervals.

## Answer: If a $ 5000 investment earns interest of $ 500 in one year, the rate of return is 10%.

Go through the steps to understand better.

**Explanation:**

The formula for Compound interest is:

**Compound Interest = Amount - Principal**

**CI = P(1 + (r/n) ) ^{nt }- P**

Where, 'P' is the principal amount,

'r' is the rate of interest

't' is the time

'n' represents the number of times the interest is compounded per unit of time

The general format: **CI = P(1 + r ) ^{t }- P**

P = $ 5000, t = 1 years, CI = $500

Let us consider r as the rate of return calculated annually

500 = 5000(1 + r)^{1} - 5000

500 + 5000= 5000(1 + r)

5000(1 + r) = 5500

(1 + r) = 1.1

r = 1.1 - 1

r = 0.1

r = 10%