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Annual effective interest rate

Forums › ACCA Forums › ACCA MA Management Accounting Forums › Annual effective interest rate

  • This topic has 7 replies, 3 voices, and was last updated 5 months ago by mrjonbain.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • August 28, 2014 at 1:10 pm #192642
    Irum
    Member
    • Topics: 30
    • Replies: 45
    • ☆☆

    Dear John,

    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%
    Correct Answer is C.

    I could not understand that why for finding effective annual rate for investment Exe we use formula r= (1+i/n)-1 and for other we use r=(1+r)^n-1.

    Thank you

    August 28, 2014 at 3:36 pm #192675
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    There are not two formulae – it is the same formula!

    In the case of Exe, the interest is 2% every six months (4%/2).

    So if the annual effective rate is R, then 1+R = 1.02^2 = 1.0404. So R = 0.404 or 4.04%

    In the case of Wye, again if the annual effective rate is R, then (1+R)^4 = 1.20
    So, 1+R = fourth root of 1.20 = 1.0466. So R = 0.0466 or 4.66%

    August 28, 2014 at 3:44 pm #192680
    Irum
    Member
    • Topics: 30
    • Replies: 45
    • ☆☆

    Thank you so much.

    August 28, 2014 at 6:58 pm #192693
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    You are very welcome 🙂

    September 4, 2021 at 3:57 pm #634312
    cadhakan
    Member
    • Topics: 71
    • Replies: 123
    • ☆☆

    sorry sir i didnt get it.
    can you plz explain why u did 4*6/12 for exe?

    i didnot get it for wye too. can you plz explain more in detail.

    August 21, 2022 at 10:47 pm #663874
    teshwar
    Participant
    • Topics: 26
    • Replies: 23
    • ☆

    In the case of Wye, again if the annual effective rate is R, then (1+R)^4 = 1.20
    So, 1+R = fourth root of 1.20 = 1.0466. So R = 0.0466 or 4.66%

    So I don’t understand why u meant by fourth root. Are you saying we should do 1.20^4

    Sir in bpp answer showed that 1.20^.025 – 1 = 0.0466

    Can you please say where did they got the 0.25 from?

    5% p.a and semi annual is 2.5%

    August 22, 2022 at 7:00 am #663884
    mrjonbain
    Moderator
    • Topics: 1
    • Replies: 1576
    • ☆☆☆☆☆

    If you want to ask the tutor something directly please use the ask the tutor forum. Think the reason 4 is used is because it is one payment at end of 4 years.

    ??N is equivalent to N^0.25
    Because 0.25=1/4

    August 22, 2022 at 7:01 am #663885
    mrjonbain
    Moderator
    • Topics: 1
    • Replies: 1576
    • ☆☆☆☆☆

    https://opentuition.com/forum/ask-acca-tutor-forums/ask-the-tutor-acca-ma/

    Hope this helps.

  • Author
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