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effective interest rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › effective interest rate

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • November 30, 2015 at 8:29 am #286320
    yongwei21
    Member
    • Topics: 7
    • Replies: 4
    • ☆

    Hi Sir, please help me to answer the question below.

    Investment P offers of 5% per year compounded half yearly for a period of 4 years
    Investment Q offers one interest payment of 18% at the end of its 4 year life.
    what is the annual e.i.r offered by each of the two investment?

    November 30, 2015 at 11:38 am #286385
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54764
    • ☆☆☆☆☆

    P pays interest of 5%/2 = 2.5% every six months.
    Therefore the annual rate for P = 1.025^2 – 1 = 0.050625 or 5.0625%

    Q pays 18% over 4 years, therefore if the annual rate is R, then:
    (1+R)^4 = 1.18
    R = 0.422 or 4.22% per annum

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