Interest rates : GMAT Quantitative Section
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# Interest rates

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Senior Manager
Joined: 05 May 2011
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21 Aug 2011, 13:28
there is a question in the veritas workbooks that asks: Convert a semi-annual compounded interest rate of 10% to an annual compounded interest rate.

Please let me know how to solve, thank you
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Joined: 19 Jul 2011
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21 Aug 2011, 13:35
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1+(interest rate)*1+(interest rate)
1.1*1.1= 1.21
answer - 1 = 0.21 or 21%

Hope this helps
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22 Aug 2011, 06:22
rates are always quoted for one year as far as I know

100*(1+0.1/2)*(1+0.1/2) = 100*1.05*1.05 = 110.25 => 10.25% is the annual rate
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22 Aug 2011, 12:55
This is not hard, my solution:
1+(interest rate)*1+(interest rate)
1.1*1.1= 1.21
answer - 1 = 0.21 or 21%

rjdunn03 wrote:
there is a question in the veritas workbooks that asks: Convert a semi-annual compounded interest rate of 10% to an annual compounded interest rate.

Please let me know how to solve, thank you
Veritas Prep GMAT Instructor
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22 Aug 2011, 20:55
rjdunn03 wrote:
there is a question in the veritas workbooks that asks: Convert a semi-annual compounded interest rate of 10% to an annual compounded interest rate.

Please let me know how to solve, thank you

The calculation involved is pretty straight forward. The only tricky part is how to convert semi annual rate to annual rate.

What do you mean by semi annual interest rate? It is the rate at which you earn interest in 6 months. When you say it is 10%, you get $10 on$100 in 6 months.
Now the question is, what does it mean in annual interest rate terms?
After 6 months, you have $110 in hand. In the next 6 months, you will earn another 10% on 110 i.e.$11. So in a year, you earned a total of $10+$11 = $21 on the initial$100 investment.
So the equivalent annual interest rate is 21%.
Note that it is more than 20% (2*10%) because we are dealing with compound interest rate.

For more on Simple and Compound interest, check:
http://www.veritasprep.com/blog/2011/03 ... imple-one/
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