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Two investments are available.
Invest_P offers interest of 5% per year compounded half yearly for a period of 4years
Invest_Q offers one interest payment of 18% at the end of its 4years.What is the annual effective rate offered by each of two investments.
Dear Sir,
Please help me to explain above questions.
Thanks
P: The interest is paid 2.5% every half year.
The annual effective rate is (1.025)^2 – 1 = 0.050625 (or 5.0625%)
Q: If the annual rate is R, then (1+R)^4 = 1.18
So 1+R = fourth root of 1.18 = 1.0422So R = 0.0422 (or 4.22%)
You might find my free lecture on interest to be useful.
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