# Interest

1. says

Mr. Moffat

After watching your lecture working through the couple of examples you had on calculating the effective interest rate, I used the same examples to calculate the effective interest rate using a formula that the Kaplan text provides to calculate effective rates: r = (1+i/n)^n – 1, where r is the effective interest rate and i is the nominal one, n os the number of time periods. Using that formula to calculate the effective interest for example 4, the formula would have the following numbers: r = (1 + (0.02)/12)^12 – 1 which results in an effective rate of 0.02183 or 2.018% (compared to 26.82% in your answer). I’m assuming that the formula is correct and that I am missing something. Any chance you can spot my mistake?

Thank you!

• says

The interest is 2% per month, and so the annual rate is 1.02^12 – 1 = 1.2682 or 26.82%

(You would only take 0.02/12 if 2% was the yearly rate)

Think about it – 2% per month could not possible be equivalent to 2.018% per year!!!

2. says

Im getting crazy now..now you multiplied 1.06 times 5 on calculator..Please give me the details.
: (

• says

On my calculator you type 1.05, then press ‘x’ twice, then press ‘=’ five times.

Might not be the same on all calculators though!

• says

you are awesome, I was close to killing myself..: ) Thanks! Yes, I noticed it, sometimes I have another figure … If its acceptable than OK.

3. says

Loan taken = £2,000
Interest reate = 10% per annum.
The person wishes to make equal monthly repayments comprising interest and principal, over 3 yrs starting one month after the loan is taken out.
What would be the monthly repayment on the loan?

Sir can you please explain how to calculate this?
Thank you

• says

I don’t know where you got this question from, but I would be very surprised if it would be asked in the exam!

First you need to calculate the interest rate per month. If the monthly rate is r, then
(1+r)^12 = 1.10. So r = 0.00797414 (or 0.797414%)

Then you need to calculate the annuity discount factor for 36 periods, using the formula.
Which is (1 – 1/((1.00797414)^36))/0.00797414 = 31.18646

The monthly payment will be the amount of the loan divided by this annuity factor:
2000 / 31.18646 = \$64.13.

(You had better check my arithmetic )

Again, I would be very surprised indeed if this were to be asked in a real F2 exam.

• says

Thank you Sir.
This is a question from past exam papers. Year 2002 No. 2.

Do you think we can still get such type of questions in future exams of F2?

• says

You are welcome.

And no, although you are not wasting your time looking at the question, they do not ask that sort of question these days.

In 2002, Paper F2 did not exist – it was a different exam with a different syllabus (more statistical). Also, in 2002 there were no multiple choice questions, whereas now it is entirely multiple choice.

• Sir, I’m also interested in this question due to nature of my job. How did u arrive at r=0.00797414? Also what is the formula used to get annuity factor 31.8646? Thank you

• says

For the calculation of 0.00797414, as I wrote in the previous comment (1+r)^12 = 1.10, so 1+r = the 12th root of 1.10.

The formula for the annuity discount factor is printed at the top of the annuity factor tables that is provided in the exam.

• Okay sir…Thanks for the good thing u are doing

4. says

Sir, what’s an ARR? and do you have any examples on this like the ones tested in the revision mock exam.

• says

Accounting rate of return is average profit / average investment as a percent.

You should see the chapter (and the lectures) on investment appraisal for examples and explanation.

• says

i do not see any chapter of investment appraisal in the list of F2 lectures.

• says

Try chapter 21 in the Course Notes and the lectures that go with it

5. says

A Co adds interest monthly to investors’ accounts even though interest rates are expressed in annual terms. The current rate of interest is 6% per annum
An investor deposits \$1000 on 1 Jan . How much interest will have been earned by 30 June?

and I my answer is \$ 30

• says

The interest is 6/12 = 0.5% per month,but it is compounding.

The amount owing in six months will be 1000 (1.005)^6 = 1030.38

6. says

What is the accepted rounding in terms of decimal places for ACCA exams?

• says

It depends on the question – there is no rule.

For example, usually if we are calculating unit costs then we round to the nearest cent. If we are calculating total costs then we usually round to the nearest \$.

For Paper F2, the answers to choose from make it obvious what rounding (if any) is needed. (Or, if you are doing CBE and a question asks you to type in an answer then it will tell you ‘to the nearest \$’ or ‘to the nearest \$100′ or whatever.

In later exams where you have to write a full answer rather then just choosing one from four, then unless you are told different then it is usually to the nearest \$ for total costs and the nearest cent for unit costs. (Although the markers are sensible – you don’t normally lose marks for rounding unless it is ridiculous)

• says

Because you put your question under the lecture on interest, for interest rates the choice of answers or the wording of the question will make it clear – sometimes it will be to the nearest % and sometimes it will be to two decimal places.

• says

Thanks very much for this insight. Thanks again

7. says

Thank you. OT the lectures helped me a lot it was my second sitting for F2. Today I passed my computer based exam.

8. says

Hi there,

Can you please explain this question?
Hi there,

Can you please explain this question taken from June 2012 exam paper?

An investor has the choice between two investments. Investment Exe offers interest of 4% per year compounded semi-annually for a period of three years. Investment Wye offers one interest payment of 20% at the end of its four-year life.
What is the annual effective interest rate offered by the two investments?
Investment Exe Investment Wye
A 4·00%n 4·66%
B 4·00% 5·00%
C 4·04% 4·66%
D 4·04% 5·00%

Thanks.

• says

Investment Exe annual effective return = (1+ 0.04/2)^2 – 1 = 0.0404 or 4.04%
Investment Wye annual effective return = (1+ 0.20)^0.25 – 1 = 0.0466 or 4.66%

• says

Ruby, could you write the common formula for annual effective rate? In course notes I found r = (1+i/n)^n -1, where r – effective interest rate,
i – nominal interest rate, n – number of time periods. But I am a bit confused, because according to the video lecture, the formula is without division into n (i/n)

Thank you

9. says

Hi there,

Can you please explain this question taken from June 2012 paper?

An investment centre earns a return on investment of 18% and a residual income of \$300,000. The cost of capital is 15%. A new project offers a return on capital employed of 17%. If the new project were adopted, what would happen to the investment centre’s return on investment and residual income?

Return on investment Residual income
A increase decrease
B increase increase
C decrease decrease
D decrease increase

Thanks.

• says

New project has ROCE = 17% >> This will make average ROI of the centre decrease
>>> Profit decreases, Investment increases
>>> Residual income (= Profit – Interest on investment) also decreases.

Hope that helps

• says

Oh I made a mistake. The new project offer a return of 17%, higher than the cost of capital 15%, so the residual income will increase, not decrease.

• says

Since 17% is less than the current ROI of 18%, the ROI will decrease.
Since 17% is greater than the cost of capital of 15%, the RI will increase.

10. says

very good, and regarding multiply 100*(1.02) twelve time by calculator is easy, but any body let me know how can i give the formulla in excel sheet to do the same?

11. says

the last question wasn’t half yearly….he said every two months, I dn’t think I grasp that last ques.

12. says

why is the 1.03 to the power 6 and not 2 in the last example? because you said every 2 months.

• says

His reason for using 6 instead of 2 because it is every two months for one year which would be 6