Question

If the annual interest rate is 5.9% and the interest rate per compounding period is 0.98%. what is the compounding period?

a) semiannually
b) quarterly
c) bi-monthly
d) weekly

Answer 1

The compounding period is a) semiannually (twice a year).

Step-by-step explanation:

To determine the compounding period, we can use the formula:

Compounding period = (1 + interest rate per period)^number of periods

Given:

Annual interest rate = 5.9% = 0.059

Interest rate per compounding period = 0.98% = 0.0098

Let's calculate the number of periods:

(1 + 0.0098)^number of periods = 1 + 0.059

Dividing both sides by 1 + 0.0098:

number of periods = log(1 + 0.059) / log(1 + 0.0098)

Using a calculator, we find that the number of periods is approximately 6. Therefore, the compounding period is semiannually (twice a year).