Question

John plans to withdraw $250 at the end of each month for four years, considering a 4% interest rate compounded semi-annually. What is the effective interest rate per monthly payment interval?

A. 1.24%
B. 0.3396%
C. 3.396%
D. 2.3396%

Answer 1

To find the effective interest rate per monthly payment interval, we use the compound interest formula. In this case, the effective interest rate is B) 0.3396%.

Step-by-step explanation:

To find the effective interest rate per monthly payment interval, we need to determine the compound interest factor for each payment interval. In this case, the interest rate is 4% compounded semi-annually. The number of payment intervals per year is 12, and the number of years is 4. Now, we can use the compound interest formula:

Effective Interest Rate = (1 + Nominal Interest Rate / Number of Payment Intervals) ^ Number of Payment Intervals - 1

Plugging in the values:

Effective Interest Rate = (1 + 0.04 / 24)²⁴ - 1 = 0.3396 or 0.3396%

Therefore, the effective interest rate per monthly payment interval is 0.3396% (Option B).