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My Dear Tutor, I have a question.I need your help
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% 4·66%
B 4·00% 5·00%
C 4·04% 4·66%
D 4·04% 5·00%EAIR=1+R=(1+r) power n
so R=(1+0.04) power of 3 years but why i can not get the correct answer?
Could you help me about explanation.?Because it is compounded semi-annually, the interest is 2% every six months.
In 1 years there are 2 six-monthly periods.Therefore if R is the annual cost, then 1 + R = 1.02^2 = 1.0404
R = 0.0404 or 4.04%(3 years has nothing to do with it – the question asks for the annual effective interest rate)
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