Suppose that you have $5000 to invest. Which investment yields the greater return over 5 years: 5.5% compounded semiannually or 5.25% compounded monthly?
Added by Carolina A.
Step 1
For the 5.5% compounded semiannually: The nominal interest rate is 5.5%, so the semiannual interest rate is 5.5%/2 = 2.75% or 0.0275 in decimal form. Since it's compounded semiannually, there are 2 compounding periods in a year. EAR = (1 + 0.0275)^2 - 1 ≈ Show more…
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