An annuity account earns biannual payments (e.g. two payments per year) and hads an annual interest rate of 4%. What value of r must be substituted into the formula to calculate the future value of the annuity?

Question

1)2
2)0.02
3)0.01
4)0.04

Answer 1

To calculate the future value of an annuity with biannual payments and an annual interest rate of 4%, we need to adjust the interest rate to reflect the fact that payments are made twice a year.

1. The annual interest rate is 4%, which is 0.04 when expressed as a decimal.

2. Since there are two periods per year, you need to divide the annual interest rate by the number of periods per year (which is 2):

   \[ r = \frac{0.04}{2} = 0.02 \]

So the value of \( r \) that must be substituted into the formula to calculate the future value of the annuity is \( 0.02 \).

The correct answer is: 2) 0.02