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klasskru [66]
3 years ago
9

A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. What is the investment's ef

fective annual rate (rEAR)?
Mathematics
1 answer:
uranmaximum [27]3 years ago
5 0
The effective rate is calculated in the following way:
r =  {(1 +  \frac{i}{n} )}^{n} - 1
where r is the effective annual rate, i the interest rate, and n the number of compounding periods per year (for example, 12 for monthly compounding).
our compounding period is 2 since the bank pays us semiannually(two times per year) and our interest rate is 8%
so lets plug in numbers:
r = {(1 +  \frac{8\%}{2}) }^{2}  - 1 \\ r =  {(1 +  \frac{1}{25}) }^{2}  - 1 \\ r =  \frac{676}{625}  - 1 \\ r = 0.0816 \: or \: 8.16\%
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