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What is the effective annual rate if a bank charges you 10% compounded semiannually? Select one: O a
What is the effective annual rate if a bank charges you 10% compounded semiannually? Select one: O a. 10.25% O b. 12.25% O c. 10% O d. 10.5%
Expert Solution
Effective rate of interest = [( 1 + Annual Interest rate / Number of Compounding) ^ Number of compounding] - 1
Number of Compounding = Semi-Annual
= 12 Months / 6 Months
Number of compounding = 2
Effective rate of interest =[ ( 1 + 10%/2)^2] - 1
= (1+5%)^2 - 1
= 1.1025 - 1
= 0.1025
In Percentage , 0.1025*100
= 10.25%
So, Option A is the correct answer
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