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Effective intereset Quiz on ACCA website

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Effective intereset Quiz on ACCA website

  • This topic has 1 reply, 2 voices, and was last updated 8 months ago by John Moffat.
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  • Author
    Posts
  • May 20, 2022 at 12:26 pm #656078
    lookinout
    Participant
    • Topics: 6
    • Replies: 6
    • ☆

    This quiz qestion’s anwer is not clear:

    Question:
    ———————————-
    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

    —————————————–
    Answer
    —————————————–
    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%

    —————————————

    Where do the numbers in 41.20 – 1 = 0.0466 come from?

    May 20, 2022 at 3:37 pm #656085
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51563
    • ☆☆☆☆☆

    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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