(Last Word) 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

Question

Quizplus · Accepted Answer

When interest is compounded twice a year, the annual interest rate is calculated using the formula:

Effective Annual Interest Rate = (1 + (Annual Interest Rate / Number of Compounding Periods))^Number of Compounding Periods - 1

In this case, we have an annual interest rate of 10 percent and interest is compounded twice a year. Substituting the values into the formula, we get:

Effective Annual Interest Rate = (1 + (0.1 / 2))^2 - 1
= 1.1025 - 1
= 0.1025 or 10.25 percent

So, the actual annual interest rate you receive is 10.25 percent, which is higher than the stated annual interest rate of 10 percent. Therefore, the best choice is C) 10.25 percent.

(Last Word) Suppose You Deposit $5,000 in a Bank That