Question

A bank is offering to sell 6-month certificates of deposits for $12,000. At the end of 6 months, the bank will pay $13,000 to the certificates owner. Compute the nominal annual interest rate and the effective annual interest rate

Answer 1

Answer:

16.67% and 17.36%

Explanation:

The computation is shown below:

Nominal annual interest rate is

Let us assume the nominal annual interest rate be X%

$12,000 × X% × 6 months ÷ 12 months = $13,000 - $12,000

$12,000 × X% × 6 months ÷ 12 months = $1,000

$6,000 × X% = $1,000

So X% is 16.67%

i.e nominal interest rate is 16.67%

Now the effective annual interest rate is

= (1 + 16.67% ÷ 2)^1 × 2 - 1

= (1 + 0.08335)^2 - 1

= 1.1736472225 - 1

= 17.36%