Sir, i have a doubt in the question below.
I am unable to solve the answer using the formular specially for Investment Y.
An investor has a choice btwn two investments. Investment X offers an interest of 4% per year compounded semi-annually for a period of 3 years.
Investment Y offers one interest payment of 20% at the end of its 4 year life.
What is the annual effective interest rate offered by the two investments ?
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Effective Interest rate
8y ago#1For investment X:
The interest rate is 2% every six months. Therefore the compounded annual interest rate is (1.02^2) - 1 = 0.0404 or 4.04%
For investment Y:
If the annual interest rate is R, then (1+R)^4 = 1.20.
Therefore R = (fourth root of 1.20) - 1 = 0.0466 or 4.66%
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