Question

i need help with number 2 please

the value dt til 4 01 3,400 l ve Paru at the (2) Sylvia invests her money in an account earning interest based on simple dis- count at a 2% annual rate. What is her effective interest rate in the fifth year?

Answer 1

The annual effective rate of interest for year t, which we denote by i(t), is the ratio of the amount of interest earned in a year, from time t−1 to time t, to the accumulated amount at the beginning of the year (i.e., at time t−1):

i(t) = { a(t) − a(t−1) } / a(t−1)

For the simple-discount method, we have a(t) = 1/ (1−dt), where d=2% is the simple discount rate.

a(5) = 1/(1−0.02×5) = 10.9

a(4) = 1 / (1−0.02×4)=10.92

i(5) = { a(5) − a(4) } / a(4) = 2.22%

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