The stated interest rate on your account is 7.12% with interest paid semiannually.Your effective rate of interest will be

Question

Quizplus · Accepted Answer

The effective rate of interest takes into account the compounding of interest over time. In the case of semiannual compounding, the effective rate of interest is higher than the stated interest rate.

To calculate the effective rate of interest, we use the formula:

Effective rate of interest = (1 + (annual interest rate ÷ n))^n - 1
Where n = number of compounding periods per year (in this case, 2 since it's semiannual)

Plugging in the values, we get:

Effective rate of interest = (1 + (7.12% ÷ 2))^2 - 1
= (1 + 0.0356)^2 - 1
= 0.0733 or 7.33%

Therefore, the effective rate of interest is greater than the stated interest rate of 7.12%. So, the best choice is C.

The Stated Interest Rate on Your Account Is 7