The effective annual rate of interest corresponding to a nominal rate of 6% per annum payable half-yearly is:
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Nominal rate of interest = 6% per annum
Compounding frequency = Half-yearly (2 times a year)
Effective annual rate of interest formula:
Effective Rate = (1 + (R/n))^(n) – 1
where R = nominal rate, n = compounding frequency
Effective Rate = (1 + (6/2)/100)^(2) – 1
= (1 + 3/100)^(2) – 1
= (1.03)^2 – 1
= 1.0609 – 1
= 0.0609
Effective annual rate of interest ≈ 6.09%
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