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ms500
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Joined: 30 Jun 2008
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Posted: 05 Feb 2009 at 19:20 \| IP Logged

i=stated rate of int , p=no# of period is 2

effective rate of int= 0.0774 +1=1.0774

squareroot of 1.0774=1.038

1.0380= (1+(i/2))

1-1.038=.038 times 2=.076 i.e. 7.6 %

this question is from beckers final test 2

some how I got the answer, appreciate if some one can explain in better way

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arushi_13
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Posted: 05 Feb 2009 at 19:22 \| IP Logged

The effective interest rate formula
= [( 1+ i/p) ^p ]- 1
^p ---> means to the power of p where p = 2 as interest is paid semi annually.
Substituting values...
7.74% = [(1+ i /2)^2]-1
1+7.74% = [(1+i/2)^2
1.0774 =[(1+i/2)^2
To eliminate ^2...
Square root (1.0774) = square root[(1+i/2)^2]
1.03798 = (1+i/2)
Thus, i = (1.03798-1)*2 = 7.6%

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Arushi

CPAstdy
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Posted: 05 Feb 2009 at 19:22 \| IP Logged

Got it!!Thank you so much!

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