What is the effective annual rate of 10 percent compounded semiannually?

Solution:

Compounded semiannually means that the rate of interest is charged every 6 months which makes it half a year.

Formula = (1 + Nominal Rate/Number of periods)^{Number of periods} -1

Since we need the EAR compounded semiannualy, numbe rof periods = 2

Effective Annual Rate = (1 + 10%/2)² -1

= (1 + 5%)² - (1)

= 1.05² -1

= 1.1025 - 1

Effective Annual Rate = 10.25%

Thus, the effective annual rate of 10 percent compounded semiannually will be 10.25%.]

What is the effective annual rate of 10 percent compounded semiannually?

Summary:

The effective annual rate of 10 percent compounded semiannually will be 10.25%.