What is the effective interest rate on a bank savings account which pays six percent, compounded semi-annually?

Question

Quizplus · Accepted Answer

To calculate the effective interest rate, we need to take into account the compounding period. In this case, the interest is compounded semi-annually, which means twice a year.

The formula for effective interest rate is:

Effective rate = (1 + (nominal rate / n))^n - 1

Where:
- n is the number of times the interest is compounded per year
- nominal rate is the interest rate stated as an annual percentage

Plugging in the values for this savings account, we get:

Effective rate = (1 + (0.06 / 2))^2 - 1
Effective rate = 0.0609 or 6.09%

Therefore, the answer is B.

What Is the Effective Interest Rate on a Bank Savings