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Hi Sir
Please I need help for this.
An investor has the choice between 2 investments. Investment EXe offers interest of 4% a year compounded semi-annually for a period of 3 years. Investment wye offers one interest payment of 20%at the end of its 4 year life.what’s the annual effective interest rate offered by 2 investments.
I still don’t understand why they got 1.02^2 for the 1st and 1.2^0.25 for the 2nd
Exe gives 2% (4%/2) every six months.
If you invested 100, then after six months it would be 102. After another 6 months it would be 102 x 1.02 = 1.0404. This is the same as 4.04% per year.
If Wye was giving interest of R every year, then 100 invested for 4 years would grow to 100 x (1 + R)^4.
So 100 x (1+R)^4 must equal 100 x 1.20
So 1+ r = the fourth root of 1.20
yes Sir but I don’t understand , they said for a period of 3 years but in the answer i can’t see 3
The three years is not relevant because it asks for the annual effective rate (not the three year rate).
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