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Sir I can’t understand the 2nd investment why did they divide20/4 =5 saying its less than 5% yet there is interest of 1% payment of 20?
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 interest rate offered by the two investments? Investment Exe
A 4.00% B 4.00% C 4.04% D 4.04% Investment Wye 4.66% 5.00% 4.66% 5.00%Nobody has divided 20 by 4 !!
Suppose they invested $100 for 4 years with annual interest of R per year.
After 4 years it would have grown to 100 x (1+R)^4
With just 20% interest at the end of 4 years, then it would have grown to 100 x 1.20
So 100 x (1 + R) ^4 = 100 x 1.20
1+R = fourth root of 1.20 = 1.0466
R = 0.0466 or 4.66%(That is the answer that shows as correct in our test. If you have seen a different answer in some other test then they are wrong 🙂 )
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