If interest on a savings account is compounded semiannually,the effective rate of interest will be:

Question

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When interest is compounded semiannually, the interest earned in the first six months is added to the principal amount, and interest is then earned on this new balance for the second six months of the year. This means that the effective rate of interest will be higher than the nominal rate because the interest earned in the first six months is also earning additional interest in the second six months.

If Interest on a Savings Account Is Compounded Semiannually,the Effective