Question

Pepper earns interest at a nominal rate of 8.75% compounded semi-annually. A 0.1% expense is charged semi-annually to the account immediately after the interest is earned. What annual effective yield is Pepper receiving?

Answer 1

Nominal interest rate earned =   8.75%   semiannually
expenses charged =   0.10%   semiannually
Net return (r) = 8.75% - 0.10% =   8.65%   semiannually
no. of compounding in a year (m) =   2  
      
      
Effective annual interest formula (i)= (1+(r/m))^m-1      
((1+(8.65%/2))^2) - 1      
1.088370563   -1  
0.0883705625   or 8.84%

So, Effective Annual yield is 8.84%.