Question

What is the difference between a rate that is compounded annually and a rate that is compounded semiannually

Answer 1

Answer:

the rate compounded semi-annually is compounded twice in a year. thus, this rate is higher than the rate compounded annually which is compounded once in a year

Step-by-step explanation:

The formula for calculating future value:

FV = P (1 + r/m)^mn

FV = Future value  

P = Present value  

R = interest rate  

N = number of years

m = number of compounding

For example, there are two banks

Bank A offers 10% rate with semi-annual compounding

Bank B offers 10% rate with annual compounding.

If you deposit $100, the amount you would have after 2 years in each bank is

A = 100x (1 + 0.1/2)^4 = 121.55

B = 100 x (1 + 0.1)^2 = 121

The interest in bank a is 0.55 higher than that in bank B