Your investment account has an interest rate of 10% compounded semi-annually.This is the equivalent of an effective annual interest rate of
A)1.1025%.
B)5%.
C)10%.
D)10.25%.

Question

Quizplus · Accepted Answer

The formula to calculate effective annual interest rate (EAR) is:
EAR = (1 + (nominal interest rate / number of compounding periods))^number of compounding periods - 1
In this case, the nominal interest rate is 10% and number of compounding periods is 2 (since it is compounded semi-annually). So, putting these values in the formula:
EAR = (1 + (0.10 / 2))^2 - 1 = 0.1025 or 10.25%
Therefore, the correct answer is D.

Your Investment Account Has an Interest Rate of 10% Compounded