Question

A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually ? A) 5.04% B) 7.56% C) 6.30% D) 12.60%

Answer 1

The periodic interest rate applicable semiannually is approximately C. 6.30%.

How to solve

To determine the periodic interest rate applicable semiannually for a bank that pays interest semiannually with an EAR of 13%, you can use the following formula:

Periodic interest rate = (√(1 + EAR) - 1) / Number of compounding periods per year

In this case, the EAR is 13% and the number of compounding periods per year is 2 (since interest is compounded semiannually). Plugging these values into the formula, we get:

Periodic interest rate = (√(1 + 0.13) - 1) / 2 ≈ 0.0630

Therefore, the periodic interest rate applicable semiannually is approximately 6.30%.