An investment provides a 2% return semi-annually,its effective annual rate is
A)2%.
B)4%.
C)4.02%.
D)4.04%.
E)none of the above.

Question

Quizplus · Accepted Answer

The formula for calculating effective annual rate (EAR) for semi-annual compounding is EAR = (1 + r/n)^n - 1, where r is the stated annual interest rate and n is the number of compounding periods per year. In this case, r = 2% and n = 2 (since the interest is paid semi-annually). Plugging in those values, we get EAR = (1 + 0.02/2)^2 - 1 = 0.0404 or 4.04%. Therefore, the correct answer is D.

An Investment Provides a 2% Return Semi-Annually,its Effective Annual Rate