Effective Interest rate

This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.

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October 11, 2018 at 7:55 pm #477437
mango1991
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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 ?
October 13, 2018 at 10:49 am #477750
John Moffat
Keymaster
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For 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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