Question

What nominal rate of interest compounded quarterly is equivalent to 5.5% compounded semiannually?

A. 5.58%

B. 5.46%

C. 5.48%

D. 5.5%

E. 5.53%

Answer 1

The nominal rate of interest compounded quarterly equivalent to 5.5% compounded semiannually is approximately 5.48% (option C).

Step-by-step explanation:

To determine the nominal rate of interest compounded quarterly that is equivalent to 5.5% compounded semiannually, we can use the formula:

Effective Annual Rate (EAR) = (1 + i/n)^n - 1

Where i is the nominal interest rate and n is the number of compounding periods per year.

For the given situation, we can set up the equation:

5.5% compounded semiannually = (1 + i/2)^2 - 1

To solve for i, we can use algebra and find that the nominal rate of interest compounded quarterly equivalent to 5.5% compounded semiannually is approximately 5.48% (option C).