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An investor has the choice between two investments. Investment exe offers interest of 4% per year compounded semi annually for a period of three years. Investment wye offers one interest payment of 20% at the end of its four year life.
What is the annual effective rate offered by the two investments?
For investment exe i got the answer.
For wye, the available solution is as follows: (1+0.20)^0.25 – 1 = 0.0466
= 4.66%how do we get the 0.25? please explain sir
If the interest is r per year, then if $100 is invested then at the end of 4 years it will have grown to 100 x (1+r)^4
This must be equal to 100 x 1.20
so (1+r)^4 = 1.20
(1+r) = fourth root of 1.2 (which is the same as 1.2^0.25)
(1+r) = 1.0466
r = 0.0466 or 4.66%
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