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Two investments are available.
Investment P offers interest of 5% per year compounded half yearly for a period of 4 years.
Investment Q offers one interest payment of 18% at the end of its 4 year life.
What is the annual effective rate of interest offered by each of the two investments?
Can I see a calculation please?For investment P, the interest is 2.5% every six months.
So the annual effective rate is (1.025^2) – 1 = 0.0506 or 5.06%
(it is to the power 2 because there are 2 six-months in a year)For investment Q, if R is the annual interest, then (1+R)^4 = 1.18
So R = (4th root of 1.18) – 1 = 0.0422 or 4.22%
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