"nominal annual interest rate of 4.5%, compounded semi-annually"
means effective of (1 + .045/2)^2 - 1 = 1.04550625 - 1 = .04550625 or ~4.55%
The frequency that the interest is paid does not affect this.
I can't seem to get the right effective interest rate for the following question:
- Savings account with a nominal annual interest rate of 4.5%, compounded semi-annually, with interest payable monthly. Find the effective interest rate.
My process: (I'm not quite sure if I'm going the right way approaching this problem)
1. Finding the semi annually rate: EAR = [1+0.045/2]^2 - 1 = 1.04551-1 = 0.45516
2. Solving for monthly: [1 + 0.4551]^ (1/12) -1 = 0.0037 or 0.37%
I got 0.37% <---definitely wrong.
Any help/input will be greatly appreciated.