Question

Find the effective interest rate for

a) 10% compounded monthly?

b) 12% compounded semiannually.

Answer 1

a) 10% compounded monthly

Effective monthly rate = 10%/12 = 0.008333333333

Effective annual rate = (1 + 0.008333333333)^12 - 1

Effective annual rate = 0.1047130674

Effective annual rate = 10.47130674%

b) 12% compounded semiannually

Effective semiannual rate = 12%/2 = 0.06

Effective annual rate = (1 + 0.06)^2 - 1

Effective annual rate = 0.1236

Effective annual rate = 12.36%