FRM Part I · FRM Exam Part I · Properties of Interest Rates
A bank quotes a deposit rate of 6% per annum with semiannual compounding. What is the equivalent annually compounded rate?
The equivalent annual rate is 6.09%. Semiannual compounding at 6% pays 3% every half year, so a dollar grows to 1.03 squared, or 1.0609, after one year. The extra 0.09% is interest earned on interest within the year.
- A6.00%
- B6.09%Correct
- C6.18%
- D6.12%
Explanation
Equivalent annual rate = (1 + 0.06/2)^2 - 1 = 1.03^2 - 1 = 1.0609 - 1 = 6.09%. The 6.00% option ignores compounding. 6.18% would come from (1.03)^2 with a wrong squaring or from quarterly-type error; it is not the result.
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