 # Effective annual rate

You sold 100 shares of stock today for 30 per share. You paid 20 per share six years ago… the stock paid no dividends during this time. What is the affective annual rate of return on your investment ? Answer is 7 % i get around 6.34% can u pls recomend som , what mistake am i doing…

First off, how were you solving it? Second, if you’re using a calculator, have you checked your settings? Since it’s not specified, assume it’s annual compounding - therefore the EAR is the same as the annual interest rate. Using the BA2+, PV=-20, FV=30, N=6, I=??=7%

i was doing it with p1-po/po = 30-20/20 = .5% , then .5/12 = .0417 = monthly rate 1+ effective annual rate = (1+monthly rate)^12 = (1+.0417)^12 = 1.6327-1 = .6327 But i didnt really think about it the way u did it … i think i need to revise interest rates

SS: The first step in your solution doesn’t account for compounding. And 10/50 is 50%, not 0.50%. Having said that, set it up as this: 30 = 20 x (1+r)^6 ==> 30/20 = (1+r)^6 ==> r = (30/20)^(1/6) - 1 Again, I’m assuming compounding is annual, so your second step isn’t needed since in the case of annual compounding the annual rate IS the EAR. Keep at it - it’ll come.

thanks

Here is an easier way in my opinion: Future Value: 30 Present Value: -20 Number of periods: 6 Interest rate: ? I = 6.99 which is rounded up to 7 This takes into account compounding. Hope this helps.

Will: Your solution is the same as I the one I posted in the second message “up top”. You must have missed it…

Thats’ where I was going wrong. just started useing the BAII plus- I didn’t know the PV value was entered as a negative number. Thanks

JClarke – either one of the PV or the FV is required to be entered as a -ve number on the TI Calculators, otherwise using the TVM functions would throw up an error. The -ve number is typically used to indicate it is an outflow, so usually the 0th Cash flow would be the -20 and the final Cash Inflow would be a +30. HTH CP

You could also apply the CAGR formula. The question states that it pays no dividends so you can realize a smooth return based on the information provided. (Ending Value/Beginning Value^(1/# of years) )-1 ((3000/2000^(1/6)) - 1 Convert this number to a percentage and you’ve got your answer.

Thanks cpk123

yeah CAGR…very easy: (Now/Then)^1/n and then subtract 1 voila!