Test Index

Time Value of Money

Question : 85 of 99

Marks: +1, -0

6\%

per annum compounded semi annually is

Solution:

Concept:

The effective annual rate converts nominal interest compounded multiple times a year into an equivalent yearly rate.

Explanation:

Nominal rate

r = 6\% = 0.06

, compounded semi‑annually, so

n = 2

Effective rate

= \left(1 + \frac{r}{n}\right)^n - 1

\left(1 + \frac{0.06}{2}\right)^2 - 1 = (1 + 0.03)^2 - 1 = (1.03)^2 - 1 = 1.0609 - 1 = 0.0609

Convert to percentage:

0.0609 \times 100\% = 6.09\%

Answer:

6.09\%

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