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Compound interest

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Compound interest

  • This topic has 7 replies, 3 voices, and was last updated 3 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • September 19, 2021 at 10:58 am #636009
    tomasm
    Participant
    • Topics: 12
    • Replies: 7
    • ☆

    Hi Sir

    I watched your lecture on this chapter and have a question

    If $1,000 is invested for three years at a 4% six monthly interest rate.
    At the end of the three years,what will be the worth of invt ?

    This is my answer

    4% six month rate = there are two 6 months in an year
    Therefore “n” will be 2 time * 3 years = 6 times compounding over the period

    1000 * ( 1.04)^6 = 1265.31

    So in this question how will we find the Effective annual rate ?
    I was trying to work it out like you demonstrated.

    The interest we paid in total was 1265.31 – 1000 = 265.31 / 1000 = 26 %

    Is this right ?

    September 19, 2021 at 2:53 pm #636016
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    No, that is not right. 26.53% is the three year interest rate.

    To get the effective annual rate, then since there are two 6 months in a year it is 1.04^2 -1 = 0.0816 or 8.16%.

    (Also, it checks nicely, because 1,000 invested for 3 years at 8.16% per year will grow to
    1,000 x 1.0816^3 = 1,265.31 🙂 )

    September 24, 2021 at 12:01 am #636394
    youshaali
    Participant
    • Topics: 51
    • Replies: 87
    • ☆☆

    Hello sir!!!!
    Could you please tell me how the answer is 12.554$ and explain also this question.

    What will be the amount of sum of an investment made 3 years back of amount 4,000$ with 10% interest compounded quarterly ?
    Ans: 12,554$

    September 24, 2021 at 8:01 am #636403
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    There are 12 quarters in 3 years.

    If interest of 10% is added every quarter, then at the end of 3 years the amount will have grown to 4,000 x (1.10^12) = 12,554

    Have you watched my free lectures on interest?

    September 24, 2021 at 11:30 pm #636427
    youshaali
    Participant
    • Topics: 51
    • Replies: 87
    • ☆☆

    But Sir! why did not we calculate effective rate of interest first ?

    September 25, 2021 at 10:52 am #636459
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Because the question does not ask for it! By all means calculate the effective annual rate and then use that, but it takes longer and is not necessary.

    Again, have you watched my free lectures on interest?

    September 25, 2021 at 4:39 pm #636489
    youshaali
    Participant
    • Topics: 51
    • Replies: 87
    • ☆☆

    thank you soo much sir
    and I will watch your lectures surely

    September 26, 2021 at 10:05 am #636510
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 8 posts - 1 through 8 (of 8 total)
  • The topic ‘Compound interest’ is closed to new replies.

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