effective annual interest rate

1) A company makes a $1,000 investment every year on December 31. Interest is 10% per year, but compounded semi-annually (every 6 months). They make 10 investments in all.

a) Find the effective annual interest rate,

Complete the table below with your answers, show work below or on separate sheet

Question Answer Comment
a Effective Annual rate= (1+5%)^2-1 =10.25%
EAR is more than the Interest rate per annum

EAR= (1+i)^m*n -1
EaR= Effective Interest rate, m= number of compounding per year, n= number of years, i= Nominal rate of interest (Annual rate/number of compounding per year)

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