If a firm pays 10% compounded semiannually, the true rate of interest is greater than 10%?

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Originally Posted by cmill511

if a firm pays 10% compounded semiannually, the true rate of interest is greater than 10%?

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Yes


(1 + .10/2)^2 - 1 = .1025 = 10.25%

The more frequently interest is compounded, the larger will be the final or terminal amount.

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