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Could you please explain how to find the effective annual rate of investment wye. The answer given has calculated it as: (1+0.2)^0.25 -1 = 0.00496. Why are we taking the period of time as 0.25.
The answer for the following question is C.
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%Writing something as ” ^0.25 ” is another way of writing “the fourth root” (but is easier to type 🙂 )
If the annual interest rate is R, then you will know from my free lectures that the interest over 4 years is (1+R)^4. Since this is equal to 1.20, the 1+R is equal to the fourth root of 1.2.
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