Question

What is the effective annual rate (keff) of 10.4% compounded 26 times a year. Round answer to two decimal places in percentage terms (for example 9.22%, not 0.09 or 0.0922). Note that 2 times a year = semiannual, 4 times a year = quarterly, 12 times a year = monthly, 26 times a year = bi-weekly, 52 times a year = weekly, and 365 times a year = daily.

Answer 1

The formula for effective annual rate is:

Effective annual rate = (1 + Nominal rate / Number of compounding periods)Number of compounding periods  - 1

Given: Nominal rate = 10.4%, Number of compounding periods = 26

Putting the values in the above formula, we get,

Effective annual rate = (1 + (10.4% / 26))26 - 1

Effective annual rate = (1 + 0.4%)26 - 1

Effective annual rate = (1 + 0.004)26 - 1

Effective annual rate = (1.004)26 - 1

Effective annual rate = 1.10937029551 - 1

Effective annual rate = 0.109370 or 10.94%