A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

Question

Quizplus · Accepted Answer

The effective annual rate (rEAR) is the annual rate that would produce the same amount of interest as the semiannual rate compounded semiannually. The formula for rEAR is:rEAR = (1 + r/n)^n - 1where:r is the semiannual raten is the number of compounding periods per yearIn this case, r = 0.08 and n = 2, so:rEAR = (1 + 0.08/2)^2 - 1 = 0.0816 = 8.16%

A Leading Bank Offers an Investment That Pays 8 Percent