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.
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%