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Question:

Henry wants to borrow $100,000 to finance his business. He is offered a rate of 6% from a local bank, but is told that he would be paying an effective interest rate of 6.09%. The frequency of compounding on this loan is closest to:

A Semi‐annually.
Explaination

Stated annual interest rate = 6%
Effective annual interest rate with monthly compounding = (1 + 0.06/12)12 − 1 = 6.17%
Effective annual interest rate with quarterly compounding = (1 + 0.06/4)4 − 1 = 6.14%
Effective annual interest rate with semi‐annual compounding = (1 + 0.06/2)2 − 1 = 6.09%