Question

8. (a) If the annual interest rate is 6%  and interest is compounded semiannually, what is the

                 effective annual interest rate?

            (b) If the annual interest rate is 9% and interest is compounded every four months (3

                 times a year), what is the effective annual interest rate?

            (c) If the annual interest rate is 7.25% and interest is compounded every three months (4 times a year), what is the effective annual interest rate?

Answer 1

a) The effective annual rate of interest is computed here as:

Therefore 6.09% is the required effective annual interest rate here.

b) As the interest rate here is compounded every 4 months, the effective annual interest rate here is computed as:

Therefore 9.2727% is the required annual effective rate of interest here.

c) Again using the same process like in above 2 parts, we have here:

Therefore 7.45% is the required effective annual interest rate here.