• Aug 11th 2012, 07:39 AM
yoshimuru
Assuming that interest is compounded annually, what interest rate
would give the same total return after 6 years as Scheme 1?

how would i work this out, would appreciate any help!,
• Aug 11th 2012, 11:43 AM
SpringFan25
• Aug 11th 2012, 12:16 PM
yoshimuru
3. You have £5000 to invest but you have to choose between two different
schemes:
Scheme 1: pays a single payment after 6 years, equivalent to your initial
investment plus 30% of the initial investment.
Scheme 2: pays interest compounded annually at a rate of 4.2% per
annum.
a) Which scheme results in the largest return after 6 years? (6)
b) Assuming that interest is compounded annually, what interest rate
would give the same total return after 6 years as Scheme 1? (6)
• Aug 11th 2012, 12:32 PM
SpringFan25
the accumulation on sch 1 is: $\displaystyle 1.3 \times 6000$

the accumulation for sch 2 is $\displaystyle 6000 \times (1+i)^6$

you want these to be equal:
$\displaystyle 6000 \times (1+i)^6 = 1.3 \times 6000$
solve for i.
• Aug 12th 2012, 09:27 AM
Wilmer
Typo SF: 5000
• Aug 13th 2012, 04:49 AM
yoshimuru
don't want to sound dumb but i cant remember how to work out those equations, any point in the right direction would help alot, cheers guys and thanks for your input so far. :)
• Aug 13th 2012, 08:33 AM
Wilmer
Well, you need to solve this for r (r = rate):
5000(1 + r)^6 = 5000(1.3)
Divide by 5000:
(1 + r)^6 = 1.3
Can you finish it now?
Hint: if a^x = b, then a = b^(1/x)