One bank offers you 4% interest compounded semiannually.What would the equivalent rate be if interest were compounded quarterly?

Question

Quizplus · Accepted Answer

To find the equivalent rate when compounding frequency changes, we use the formula for effective annual rate (EAR). For semiannual compounding at 4%, EAR = (1 + 0.04/2)^(2) - 1. To find the equivalent quarterly rate, we set this EAR equal to (1 + r/4)^(4) - 1, where r is the quarterly rate. Solving for r gives us an equivalent rate slightly less than 4%, with 3.98% being the closest option.

One Bank Offers You 4% Interest Compounded Semiannually