Question

Refer to Narrative 11-1. Omar invests $3,000 at 12% interest, compounded semiannually for 2 years. Calculate the effective interest rate for his investment. (Round to nearest hundredth percent)

a. 10.80%
b. 9.65%
c. 12.36%
d. 12.52%

Answer 1

Explanation:

Given that Omar invests $3,000 at 12% interest, compounded semiannually for 2 years.

halfyearly compounding = 6%

no of half years = 4

FInal amount after 2 years =
`3000(1+0.06)^4 =3787.43`

Let r be the interest compounded annually which gives same amount after 2 years.

Final amount
`3787.43=3000(1+0.01r)^2`

1+0.01r=1.1236

Equivalent interest = 12.36%