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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 20% at the end of its four-year life. What is the annual effective interest rate offered by the two investments?
Exe:
The interest is 2% every half year, and since there are two half years in a year, then:
(1 + R) = 1.02 ^ 2 (where R is the effective annual rate)Wye:
(1+R)^ 4 = 1.20 (where again R is the effective annual rate)
The logic involved is explained in my free lectures on interest.
(The lectures are a complete free course and cover everything needed to be able to pass Paper F2 well.)investment Wye annual effective return 1.20^0.25 -1=0.0466 or 4.66%)
This is the answer given behind…explain me this.
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