Find the effective rate when the stated rate is 20% and the interest is compounded semiannually.
A) 21.00%
B) 20.25%
C) 21.25%
D) 22.05%

Question

Quizplus · Accepted Answer

The effective rate is given by the formula (1 + (stated rate / number of compounding periods))^number of compounding periods - 1. In this case, the stated rate is 20% and the interest is compounded semiannually, so the number of compounding periods is 2. Plugging these values into the formula, we get (1 + (0.20 / 2))^2 - 1 = 0.21, or 21%.

Find the Effective Rate When the Stated Rate Is 20