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6.03 Effective annual interest rate

Worksheet
Effective annual interest rate
1

Maria's investment of \$4000 earns interest at 5\% p.a., compounded semiannually over 3 years.

a

Find the value of the investment after 3 years.

b

Find the amount of interest earned.

c

Find the effective annual interest rate to four decimal places.

2

For each of the following investments:

i

Find the amount of interest earned in a year.

ii

Find the effective annual interest rate as a percentage to two decimal places.

a

James invested \$5000 at 3.9\% p.a. compounded daily.

b

Valentina's investment of \$8020 earned interest at 4.6\% p.a. compounded semiannually.

c

Luke invested \$4180 at 4.3\% p.a. compounded quarterly.

d

Neil invested \$3500 at 4.3\% p.a. compounded daily.

e

Christa's investment of \$7630 earned interest at 2.3\% p.a. compounded semiannually.

f

Neil invested \$2610 at 2.7\% p.a. compounded quarterly.

3

For each of the following investments:

i

Calculate the final value of the investment.

ii

Calculate the effective annual interest rate to two decimal places.

a

A \$1720 investment earns interest at 4.6\% p.a. compounded quarterly over 3 years.

b

A \$5380 investment earns interest at 4\% p.a. compounded monthly over 17 years.

c

A \$2460 investment earns interest at 4.3\% p.a. compounded semiannually over 11 years.

d

A \$6490 investment earns interest at 3.2\% p.a., compounded weekly over 3 years.

e

A \$5000 investment earns interest at 2.8\% p.a., compounded daily over 19 years. Assume there are 365 days in a year.

f

Buzz's investment of \$1590 earns interest at 4.7\% p.a. compounded daily over 19 years. Assume there are 365 days in a year.

g

Buzz's investment of \$3090 earns interest at 2.5\% p.a. compounded weekly over 4 years. Assume there are 52 weeks in a year.

h

James invested \$3\,000 at 4.6\% p.a. compounded daily. Assume there are 365 days in a year.

4

Find the effective rate for the following, correct to one decimal place:

a

A loan that attracts interest at a rate of 6.7\% compounding monthly

b

A loan that attracts interest at a rate of 1.8\% compounding annually

c

An investment that earns interest at a rate of 9.1\% compounding quarterly

d

An investment that earns interest at a rate of 7.2\% compounding semiannually

e

An investment that earns interest at a rate of 4.3\% compounding daily

5

A loan of \$3200 has earned interest of \$768 after the first year. What is the effective interest rate on this loan?

6

Find the effective annual interest rate on the following, correct to three decimal places:

a

Valentina's investment of \$4180 earns interest at 3.6\% p.a. compounded quarterly over 2 years.

b

Sally's investment of \$2780 earns interest at 3.8\% p.a. compounded monthly over 20 years.

c

Han's investment of \$2110 earns interest at 3.6\% p.a. compounded semiannually over 8 years.

7

AMS Bank of offers 2 investment opportunities to investors:

  • Option 1: 6.86\% p.a. simple interest for 10 years.

  • Option 2: 6.76\% p.a. compound interest for 6 years, compounding semiannually.

a

On an investment of \$1000, find the interest earned for Option 1.

b

On an investment of \$1000, find the interest earned for Option 2.

c

Find the effective annual interest rate for Option 2, to two decimal places.

d

Which of the two investment opportunities has the larger effective annual interest rate?

8

The Bank of Hilo offers 2 investment opportunities to investors:

  • Option 1: 7.05\% p.a. simple interest for 10 years.

  • Option 2: 6.95\% p.a. compound interest for 4 years, compounding semiannually.

a

On an investment of \$1000, find the interest earned for Option 1.

b

On an investment of \$1000, find the interest earned for Option 2.

c

Find the effective annual interest rate for Option 2. Write your answer as a percentage to two decimal places.

d

Which of the two investment opportunities has the larger effective annual interest rate?

9

Two different lending institutions are offering different rates on their loans.

  • Betta Bank is offering 4.4\% compounding monthly.

  • Lucky Lending is offering 4.2\% compounding quarterly.

a

What is the effective rate of Betta Bank correct to two decimal places?

b

What is the effective rate of Lucky Lending correct to two decimal places?

c

Which institution has the better offer? Explain your answer.

10

Steph wants to invest \$1400 at 4\% p.a for 3 years. She has two interest rate options: compounding quarterly or compounding monthly.

a

Find the effective annual interest rate if it is compounded quarterly to four decimal places.

b

Find the effective annual interest rate if it is compounded monthly to four decimal places.

c

Calculate the difference in the two effective interest rates.

d

Which compounding option should Steph choose? Explain your answer.

11

You need to take out a loan and you have the following interest rate options:

  • 1.9\% compounding semi-annually

  • 1.5\% compounding quarterly

Which option would you choose? Use calculations and reasoning to explain your answer.

12

You have decided to invest some money, and you have the following options for your interest rate:

  • 1.6\% compounding monthly

  • 2\% compounding daily

Which option should you choose? Use calculations and reasoning to explain your answer.

13

Maria has \$7000 to invest for 4 years and would like to know which investment plan to enter into out of the following three:

  • Plan 1: invest at 4.98\% p.a. interest, compounded monthly

  • Plan 2: invest at 6.63\% p.a. interest, compounded quarterly

  • Plan 3: invest at 5.90\% p.a. interest, compounded annually

Determine which investment plan yields the highest return, showing calculations to support your answer.

14

Mae made an investment at a rate of 5\% p.a.. Calculate the effective annual interest rate for Mae's investment, to four decimal places, if the interest was compounded:

a

Annually

b

Semiannually

c

Quarterly

d

Monthly

e

Weekly, assume there are 52 weeks in a year.

f

Daily, assume there are 365 days in a year.

15

Dave's investment of \$17\,380 earned 6.2\% p.a. simple interest for the first 5 years and 0.29\% p.a. compound interest for the next 8 years, compounded daily.

a

Calculate the value of the investment after 5 years.

b

Calculate the final value of the investment.

c

Calculate the total amount of interest earned.

d

Calculate the average amount of interest earned per year.

e

Express the average interest per year as a percentage of the original investment. Write your answer to two decimal places.

Nominal rate
16

Calculate the nominal rate for the following investment rates. Write your answer as a percentage correct to two decimal places:

a

3.2\% p.a., compounded quarterly

b

2.7\% p.a., compounded monthly

c

13.9\% p.a., compounded quarterly

d

13.1\% p.a, compounded monthly

17

An investment has a nominal interest rate of 12\% p.a.. Calculate the following:

a

The quarterly interest rate.

b

The monthly interest rate.

c

The effective annual interest rate to two decimal places.

18

An investment has a nominal interest rate of 10.4\% p.a.. Calculate the following:

a

The weekly interest rate.

b

The effective annual interest rate to two decimal places.

19

An investment has a nominal interest rate of 7.3\% p.a.. Calculate the following:

a

The daily interest rate.

b

The effective annual interest rate to two decimal places.

20

A loan is known to have the same effective interest rate as an investment offering 11\% compounding semi-annually. If this loan is actually compounding quarterly, what is the nominal rate correct to two decimal places?

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ACMGM095

calculate the effective annual rate of interest and use the results to compare investment returns and cost of loans when interest is paid or charged daily, monthly, quarterly or six-monthly

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