Find the effective annual rate corresponding to a nominal 6% per annum payable half-yearly.
Aptitude
Compound Interest
Difficulty: Easy
Choose an option
Answer
Correct Answer: 6.09% p.a.
Explanation
Problem restatementConvert a nominal 6% p.a. with semi-annual compounding into an effective annual rate.
Given data
- Nominal rate = 6% p.a., compounding m = 2 times per year
Concept/ApproachEffective rate reff = (1 + r÷m)m − 1.
Step-by-step calculationreff = (1 + 0.06÷2)2 − 1 = (1.03)2 − 1 = 1.0609 − 1 = 0.0609 = 6.09% p.a.
Common pitfallsMultiplying 6% by 2% directly is wrong; compounding must be applied.