Engineering Board Exam Reviewer · Nominal and Effective Rate of Interest · medium
Which is the better rate for an investor: 12.2% compounded semiannually or 12% compounded monthly?
- 12.2% compounded semiannually (effective rate 12.57% versus 12.68%)
- They are equivalent
- 12% compounded monthly (effective rate 12.68% versus 12.57%)
- Cannot be compared without the principal
Answer
C. 12% compounded monthly (effective rate 12.68% versus 12.57%)
Solution
Compare effective rates. 12.2% semiannual: (1.061)2-1=12.57%. 12% monthly: (1.01)12-1=12.68%. The monthly rate gives the higher effective rate.
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