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21
21.What is the effective annual rate if a bank charges you 10% compounded semiannually?
Select one:
a. 12.25%
b. 10.5%
c. 10.25%
d. 10%
Expert Solution
Ans) c.10.25%
Effective annual rate = (1+APR/n)^n - 1
APR = 10%
n = no of compounding period = 2
Effective annal rate = (1+10%/2)^2 - 1
=(1+5%)^2 - 1
=1.05^2 - 1
= 1.1025 -1
=0.1025
i.e 10.25%
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