Question

Jessica’s bank is offering her a loan with a stated rate of 4.90% interest. If the interest is compounded every two months, what will Jessica really pay for interest?
a.
4.90%
b.
5.00%
c.
5.01%
d.
4.96%

Answer 1

Effective annual rate = (1 + 0.049/6)^6 − 1 (compounded every 2 months → 6 periods/year).

(1 + 0.049/6)^6 − 1 ≈ 1.0081666667^6 − 1 ≈ 0.0500113 = 5.00113% ≈ 5.00%

Answer: b. 5.00%