A person deposits $100 to his savings account biweekly. The savings account pays a nominal interest rate of 5% per year, compounded every six months. What is the effective interest rate for a 6-month period?

Question

Quizplus · Accepted Answer

The effective interest rate for a 6-month period can be calculated using the formula for converting a nominal annual interest rate to an effective interest rate for a specific compounding period: $ (1 + \frac{r}{n})^n - 1 $, where $r$ is the nominal annual interest rate and $n$ is the number of compounding periods per year. Given a 5% nominal annual interest rate compounded semi-annually, $n = 2$, so the calculation is $ (1 + \frac{0.05}{2})^2 - 1 = (1.025)^2 - 1 = 1.050625 - 1 = 0.050625 $ or 5.0625% annually. For a 6-month period, this is effectively half, so approximately 2.5%.

A Person Deposits $100 to His Savings Account Biweekly