effective interest rate

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November 30, 2015 at 8:29 am #286320
yongwei21
Member
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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
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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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