If an investment provides a 2% return semi-annually, its effective annual rate is
A)2%.
B)4%.
C)4.02%.
D)4.04%.

Question

Quizplus · Accepted Answer

The formula to calculate effective annual rate is:
Effective Annual Rate = (1 + (nominal rate/n))n - 1, where n is the number of compounding periods.
In this case, the nominal rate is 2%, and there are two compounding periods (semi-annually).
Plugging in the values, we get:
Effective Annual Rate = (1 + (0.02/2))^2 - 1
= (1.01)^2 - 1
= 0.0201 or 2.01%
Therefore, the correct answer is D) 4.04% (2.01% x 2).

If an Investment Provides a 2% Return Semi-Annually, Its Effective