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interest

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

  • This topic has 11 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 12 posts - 1 through 12 (of 12 total)
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  • July 10, 2016 at 10:06 am #325209
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    1.What is an effective annual annual rate of interest and what is it’s formula?

    2.A bank offers a nominal 4%pa, with interest payable quarterly. what is the effective annual rate of interest?

    The answer is 4.06%

    July 10, 2016 at 12:32 pm #325222
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    1. This is explained in the free lectures on Interest.

    2. 4% per annum = 1% per quarter.

    The effective annual rate = 1.01^4 – 1 = 0.0406 or 4.06%

    July 18, 2016 at 9:19 am #326782
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    Thanks sir.

    I do have watched your lectures twice but still has some difficulties in understanding effective annual annual rate of interest. Could you please briefly in wordings re-explain it?

    July 18, 2016 at 9:34 am #326808
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    Because of the compounding of interest, it means that (for example) 1 + the yearly rate = (1 + the monthly rate) ^12

    It is to the power 12 because there are 12 ‘lots’ of monthly interest in a year.

    July 18, 2016 at 4:25 pm #327228
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    thanks sir

    July 18, 2016 at 6:45 pm #327310
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    You are welcome 🙂

    August 2, 2016 at 6:44 pm #330921
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    Dear sir,
    I do have watched your lectures several time but still has some difficulties in understanding effective annual rate of interest. Briefly could you explain in wordings and give me the formula?

    Thanks.

    August 3, 2016 at 7:39 am #331005
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    I have given the formula in my previous answer on this page and I cannot really add anything to the explanation I wrote.

    August 7, 2016 at 5:50 pm #331845
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    1.An investor has the choice between two investments. Investment E offers interest 4% per year compounded semi-annually for a period of 3 years. Investment W offers one interest payment of 20% at the end of it’s four year time.
    What is the annually effective interest rate offered?

    The answer is E 4.04% and W 4.66%

    2 A project has an initial outflow of $12,000 followed by 6 equal annual cash flow, commencing in one year time. The payback period is exactly 4 years. The cost of capital is 12% per year.
    What is the NPV?
    The answer is $333

    -could you please help me to tackle with these 2 questions; in the book, the workings are a bit complicated to understand.

    Thanks.

    August 8, 2016 at 8:21 am #331906
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    1. The interest is 4/2 = 2% every six months.
    Therefore the annual interest rate = (1.02^2) – 1 = 0.0404 (or 4.04%)

    If there is interest of 20% over 4 years, then the annual interest rate is given by:
    (1+r)^4 = 1.2
    Therefore r = (fourth root of 1.2) – 1 = 0.0466 (or 4.66%)

    2. The can inflow must be 12,000/4 = 3,000 per year for 6 years.
    So the NPV = (3,000 x 6 year annuity d.f. at 12%) – 12,000

    August 23, 2016 at 7:58 am #334650
    adarsh1997
    Participant
    • Topics: 629
    • Replies: 278
    • ☆☆☆☆

    What do you mean by “fourth root of 1.2”?
    (How to type that in my calculator)

    August 24, 2016 at 6:08 am #334821
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51950
    • ☆☆☆☆☆

    Take the square root twice (or look up in your calculator’s instruction book).

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