Question and answer from the Schweser Qbank below.
The following has me confused: i = 0.61761 × 12 = 7.411%???
Shouldn’t it be i = 0.61761 DIVIDED by 12 = 7.411% since the 35 years was multiplied by 12?
A recent ad for a Roth IRA includes the statement that if a person invests $500 at the beginning of each month for 35 years, they could have $1,000,000 for retirement. Assuming monthly compounding, what annual interest rate is implied in this statement? A) 7.411%. B) 7.625%. C) 6.988%. Your answer: C was incorrect. The correct answer was A) 7.411%. Solve for an annuity due with a future value of $1,000,000, a number of periods equal to (35 × 12) = 420, payments = -500, and present value = 0. Solve for i. i = 0.61761 × 12 = 7.411% stated annually. Don’t forget to set your calculator for payments at the beginning of the periods. If you don’t, you’ll get 7.437%.