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The annual effective interest rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › The annual effective interest rate

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  • January 30, 2015 at 2:02 pm #224399
    Tran
    Member
    • Topics: 3
    • Replies: 3
    • ☆

    Dear Sir .
    Can you tell me the way to answer this question

    there are two investment are available
    investment P offers interest of 5% per year compounded half yearly for the period of 4 years.
    investment Q offers one interest payment of 18% at the end of its 4 years life.

    what is the annual effective interest rate of two investment.

    Thank u so much.

    January 31, 2015 at 10:55 am #224476
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54831
    • ☆☆☆☆☆

    P is interest of 5/2 = 2.5% every half year.

    So the annual effective rate is (1.025^2) – 1

    For Q, if the annual effective rate is R, then after four years (1+R)^4 = 1.18

    So R = (fourth root of 1.18) – 1

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