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kindly explain this sir

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › kindly explain this sir

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • June 1, 2015 at 2:18 pm #251331
    omar
    Member
    • Topics: 15
    • Replies: 18
    • ☆

    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%

    June 1, 2015 at 4:23 pm #251379
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54659
    • ☆☆☆☆☆

    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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