Question

Compute the effective annual interest rate for 4% compounded semi-annually.

Select one:

a. 4.32%

b. 4.04%

c. 10.40%

d. 8.16%

Answer 1

Answer:

Annual interest Rate = 4%

Semi-annual interest rate = 4% / 2 = 2%

Effective Annual Interest rate               = ( 1 + r )^n (-) 1               =   ( 1 + 2% )^2   (-) 1               =     1.0404 (-) 1               =     4.04 %

Effective Annual Interest rate   = 4.04%

Option (b) is Correct