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ms500
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Posted: 30 Jan 2009 at 21:48 | IP Logged  

The Carters signed an agreement with an effective annual interest rate of 7.74%. Interest is payable semi annually. What was the stated rate?

a-15.48

b-7.70

c-7.60

d-7.50

Ans is 'c' 7.60

Appreciate if some one can explain above

Thanks



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cpayesican
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Posted: 30 Jan 2009 at 22:48 | IP Logged  
Here the formula :
effective annual interest=  [(1+ (i/p)) TO POWER OF p] - 1 should be used.
where  i=stated interest rate
p=no.of periods in a year

in this q, the effective interest rate is given to be 7.74% and we are asked to find i.

0.0774= (1+(i/2)) SQUARED -1
1.0774=(1+(i/2)) SQUARED
SQUARE ROOT OF 1.0774 = (1+(i/2))
1.0380= (1+(i/2))

If you solve, you will get i=7.6%

Hope that helps!




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ms500
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Posted: 31 Jan 2009 at 07:53 | IP Logged  

Thanks cpayesican



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CPAstdy
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Posted: 05 Feb 2009 at 18:49 | IP Logged  

Sorry, still confused. I can't seem to get 7.6%. Can you please clarify it more.

 

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cpayesican
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Posted: 05 Feb 2009 at 19:18 | IP Logged  
cpayesican wrote:
Here the formula :
effective annual interest=  [(1+ (i/p)) TO POWER OF p] - 1 should be used.
where  i=stated interest rate
p=no.of periods in a year

in this q, the effective interest rate is given to be 7.74% and we are asked to find i.

0.0774= (1+(i/2)) SQUARED -1
1.0774=(1+(i/2)) SQUARED
SQUARE ROOT OF 1.0774 = (1+(i/2))
1.0380= (1+(i/2))

If you solve, you will get i=7.6%

Hope that helps!


continuing 1.0380-1 = i/2
.0380 * 2 = i =0.076 = 7.6%


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