Question

You are looking at an investment that has an effective annual rate of 7 percent Required: (a) What is the effective semiannual return? (Click to select) (b) What is the effective quarterly return? (Click to select) (c) What is the effective monthly return? (Click to select)

Answer 1

Answer a.

Effective semiannual return = (1 + Effective annual rate)^(1/2) - 1
Effective semiannual return = (1 + 0.07)^(1/2) - 1
Effective semiannual return = 1.03441 - 1
Effective semiannual return = 0.03441 or 3.441%

Answer b.

Effective quarterly return = (1 + Effective annual rate)^(1/4) - 1
Effective quarterly return = (1 + 0.07)^(1/4) - 1
Effective quarterly return = 1.01706 - 1
Effective quarterly return = 0.01706 or 1.706%

Answer c.

Effective monthly return = (1 + Effective annual rate)^(1/12) - 1
Effective monthly return = (1 + 0.07)^(1/12) - 1
Effective monthly return = 1.00565 - 1
Effective monthly return = 0.00565 or 0.565%