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Elena says that 6% interest compounded semi-annually is the same as 1% interest compounded every month: she reasons they are the same because they are both a 12% nominal annual interest rate. Is Elena correct that these two situations both offer a 12% nominal annual interest rate?

Sagot :

Elena is not correct in the two situations.

What is the effective annual rate?

Effective annual rate is the interest rate when the effects of compounding is taken account for.  In order to determine if Elena is correct, the effective annual rate has to be calculated.

Effective annual rate = (1 + APR / m ) ^m - 1

M = number of compounding

(1 + 0.12 / 12)^12 - 1 = 12.68%

(1 + 0.12 / 2)^2 - 1 = 12.36%

To learn more about the effective annual rate, please check: https://brainly.com/question/4064975

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