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An investor has the choice between 2 investments. Investment X offers interest at 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 time.
What is the annual effective interest rate offered by the 2 investments?Sir, i would also like to know what is the formula for effective interest rate?
Thanks again in advance.
Investment X: the interest is 2% every six months.
Therefore the effective annual rate = 1.02^2 – 1 = 0.0404 or 4.04%Investment Y: If R is the annual rate, then (1+R)^4 = 1.20
Therefore R = (fourth root of 1.20) – 1 = 0.0466 or 4.66%For the logic and formula you need to watch the free lectures on interest.
(Our free lectures are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.)
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