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.

- AuthorPosts
- August 28, 2014 at 1:10 pm #192642
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 #192675There 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 #192680Thank you so much.

August 28, 2014 at 6:58 pm #192693You are very welcome 🙂

September 4, 2021 at 3:57 pm #634312sorry 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 #663874In 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 #663884If 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=1/4August 22, 2022 at 7:01 am #663885 - AuthorPosts

- You must be logged in to reply to this topic.