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Mr John pls help me
Two investments P offers int 5% p.a. compounded half-yearly for a period of 4 years
Q offers one interest payment of 18% at the end of its 4 year life.
What is annual effective interest rate offered by each?For P:
It is 2.5% (0.025) every six months, and there are two 6 month periods in a year, so if R is the annual interest rate then (1+R) = (1.025)^2
For Q:
If the annual interest rate is R, then (1+R)^4 = 1.18
So (1+R) = fourth root of 1.18
I am very confused
would like to understand what the 1 in (1+R) stands for?for Q – why not? what would it mean if we would
(1+R) = (1.18)^4For Q, what you have written would be calculating the total interest rate for 4 years if it was 18% per year.
(To explain the 1, suppose you borrowed $100 for 1 year at 10% interest.
At the end of 1 year you would be owing 100 + 10 = 110.Alternatively you could get the same figure by multiplying 100 by 1.10 (1 + R).)
It might help you to watch my free lectures on this.
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