Effective intereset Quiz on ACCA website

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May 20, 2022 at 12:26 pm #656078
lookinout
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This quiz qestion’s anwer is not clear:

Question:
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Carter’s treasury department is now considering how to best invest a cash surplus. 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.

Which of the two investments gives the higher annual effective interest rate (work to 2 decimal places)?

Select one:
Investment Wye
Investment Exe

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Answer
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Investment Exe annual effective return = 1.022 – 1 = 0.0404 or 4.04%

Investment Wye annual effective return = 41.20 – 1 = 0.0466 or 4.66%

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Where do the numbers in 41.20 – 1 = 0.0466 come from?
May 20, 2022 at 3:37 pm #656085
John Moffat
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This is a past Paper MA question (and effective interest rates are explained in our Paper MA free lectures_.

For Exe, the annual effective return is 1.02^2 – 1 = 0.0404 or 4.04%

For Wye, it is the (fourth root of 1.20) – 1 = 0.0466 or 4.66%
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