Calculate the effective annual rate for 5% p.a. compounded semi-annually.
A) 0.050625
B) 5.0625%
C) 0.0255%
D) 2.55%
E) 15.0625%

Question

Quizplus · Accepted Answer

To calculate effective annual rate, we use the formula:

Effective annual rate = (1 + r/n)^n - 1
where r is the nominal annual rate and n is the number of compounding periods per year.

In this case, r = 5% and n = 2 (since it is compounded semi-annually).

Using the formula, we get:
Effective annual rate = (1 + 0.05/2)^2 - 1
= 1.025625 - 1
= 0.025625 or 2.5625%

Therefore, the answer is B) 5.0625% (double the effective annual rate)

Calculate the Effective Annual Rate for 5% P