Your father paid $10,000 (cf at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. what is the expected rate of return on this investment?
From the problem statement it is clear that here we need to find out simple interest rate. One do not get interest on any investment made at the end of tenure. Putting this mathematically: Let amount at the end of 5th year as A Simple Interest for 5 years, SI = 750 *5 SI = 3750 Hence A = 10000 +3750 A= 13750 Let rate of return = R Tenure t = 5 But, A = P(1 + R*t/100) 13750 = 10000( 1+ R*5/100) 13750 = 10000 + 50000R/100 3750 = 500R R = 3750/500 R = 7.5 %
