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 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..
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MAAnnual Effective interest rate
11y ago#1In 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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