Question

You are currently earning 12% (APR) compounded semiannually. Your investment company is switching all accounts to daily compounding. What rate will give you the same effective annual rate of return as you are receiving now

Answer 1

The rate that will give the same effective annual rate of return is 0.033%.

Step-by-step explanation:

a) Data and Calculations:

APR = 12%

Semi-annual compound rate = 6% (12/2)

Assumed calendar days in a year = 360 days

Effective daily rate of return = 12%/360 = 0.033%

b) The conversion of semi-annual compounding to daily compounding results in reduced rate of return. In this case, we assume that there are 360 days in a year. Since the APR = 12%, it means that the daily rate of return will be 12%/360, which is 0.033%.