Mortgage companies usually charge interest semi-annually. What would be the effective rate of interest on a mortgage at 8.25 percent semi-annually?

Question

Quizplus · Accepted Answer

To find the effective annual rate, we need to use the formula:
Effective Annual Rate = (1 + (r/n))^n - 1
where r is the nominal rate and n is the number of compounding periods per year.

For this mortgage, r = 0.0825 and n = 2 (since interest is charged semi-annually).

Plugging these values into the formula gives:
Effective Annual Rate = (1 + (0.0825/2))^2 - 1 
= (1.04125)^2 - 1 
= 0.0859 or 8.59%.

Rounding to two decimal places, the answer is 8)42 percent, which is choice B.

Mortgage Companies Usually Charge Interest Semi-Annually