1 Use the rule of 72 to estimate the doubling time in years

1.) Use the \"rule of 72\" to estimate the doubling time (in years) for the interest rate, and then calculate it exactly. (Round your answers to two decimal places.) 3% compounded annually. \"rule of 72\" _____yr exact answer _____yr

2.) Find the effective rate of the compound interest rate or investment. (Round your answer to two decimal places.) 19% compounded monthly. [Note: This rate is a typical credit card interest rate, often stated as 1.6% per month.] %_______

3.) You have just received $115,000 from the estate of a long-lost rich uncle. If you invest all your inheritance in a tax-free bond fund earning 6.6% compounded quarterly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.) _______yr

4.) You have just won $170,000 from a lottery. If you invest all this amount in a tax-free money market fund earning 7% compounded weekly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.) _______yr

Solution

1)   according to the rule of 72 formula

years to double = 72 / interest rate

years = 72 / 3 = 24 years

2) effective rate of interest rate = nominal rate / n

n = number of periods per year

for compunded monthly n = 12

therefore, effective rate of interest = 19% / 12 = .19 / 12 = .0158

effective rate of interest = .0158* 100 = 1.58 = 1.6%