Suppose you deposit $5,000 in a bank that pays 10 percent interest compounded twice a year. The actual annual interest rate you receive is

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Quizplus · Accepted Answer

The actual annual interest rate, also known as the effective annual rate (EAR), can be calculated using the formula for compound interest: $EAR = (1 + \frac{r}{n})^n - 1$, where $r$ is the annual interest rate (0.10 in this case) and $n$ is the number of compounding periods per year (2 in this case). Plugging in the values, we get $EAR = (1 + \frac{0.10}{2})^2 - 1 = (1.05)^2 - 1 = 1.1025 - 1 = 0.1025$ or 10.25 percent.

Suppose You Deposit $5,000 in a Bank That Pays 10