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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 WyeA 4·00% 4·66%
B 4·00% 5·00%
C 4·04% 4·66%
D 4·04% 5·00%Correct answer is C
I got this from June 2012 examiners report.
I think I know how to find effective interest rate for Incestment Exe..
Here is my calculation :
((1+.04/2)^2-1) x 100
Sir can you tell me if my calculation is right also help me to calculate Wyes effective interestrate..
In future, if you wish me to answer then please ask in the Ask the Tutor Forum – this forum is for students to help each other.
You calculation for Exe is correct.
For Wye, if the year interest is R, then the total interest over 4 years must be ((1+R)^4) – 1
This must be equal to 0.2 (20%).So….(1+R)^4 = 1.20
So (1+R) = fourth root of 1.2
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