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Dear Mr Moffat
I had difficulties how to get the annual effective interest rate for investment Q
If I am not wrong I have to work backward but I cannot see the logic, sorry … Could you please explain it to me.Investment Q offer an interest of 18% at the end of its four years life.
Thanks a lot
Gabbi
Suppose you were to borrow $100, and the rate of interest is R per annum.
Then after 4 years you would owe 100 x (1+r)^4.
Here, they charge 18% in total at the end of 4 years, so after 4 years you would owe 100 x 1.18
So, (1+R)^4 = 1.18
So (1+R) = fourth root of 1.18
(PS as it says on the page before the test, the questions are chosen at random from a bank of questions, so just because it is question 21 for you does not mean it is question 21 for everyone (or for me) 🙂 Make sure you give the details of the question (as you have for this one) to enable me to know which question and to be able to answer it!)
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