Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

If Tom borrows \$6,000 at a compound interest rate and must repay \$7,260 after 2 years, what is the annual compound interest rate?

12\%

15\%

8\%

10\%

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Verified step by step guidance

Step 1: Understand the formula for compound interest. The formula is: $ A = P(1 + r)^n $, where $ A $ is the amount after interest, $ P $ is the principal amount, $ r $ is the annual interest rate (in decimal form), and $ n $ is the number of years.

Step 2: Identify the values given in the problem. Here, $ A = 7260 $, $ P = 6000 $, and $ n = 2 $. The goal is to solve for $ r $, the annual compound interest rate.

Step 3: Rearrange the formula to isolate $ r $. Divide both sides of the equation by $ P $: $ \frac{A}{P} = (1 + r)^n $. Then take the $ n $-th root of both sides: $ (\frac{A}{P})^{\frac{1}{n}} = 1 + r $. Finally, subtract 1 from both sides: $ r = (\frac{A}{P})^{\frac{1}{n}} - 1 $.

Step 4: Substitute the known values into the rearranged formula. Replace $ A $ with 7260, $ P $ with 6000, and $ n $ with 2: $ r = (\frac{7260}{6000})^{\frac{1}{2}} - 1 $.

Step 5: Simplify the expression step by step. First, calculate $ \frac{7260}{6000} $, then take the square root ($ \frac{1}{2} $-th power), and finally subtract 1 to find $ r $. Convert $ r $ to a percentage by multiplying by 100.