An investor makes a payment of $100 immediately and a payment of $132 at the end of two years in exchange for a payment of $230 at the end of one year. Find the yield rate i.

• 5%
• 10%
• 15%
• 20%
• 10% or 20%

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.

Solution: E

The equation of value (at the end of year 2) is

[[math]] 100(1+i)^2+132=230(1+i) . [[/math]]

This is a quadratic in [math]i[/math] and if we solve it, we get [math]i=.1[/math] and [math]i=.2[/math]. So the interest rate is either [math]10 \%[/math] or [math]20 \%[/math]. We cannot eliminate either answer. They are both possible.

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.