A borrower has a $300,000 fixed-rate mortgage at 4% per year, compounded semi-annually, with monthly payments. What effective monthly interest rate is used to calculate the payment?
Correct Answer
A) 0.331%
With semi-annual compounding, the half-year rate is 4% ÷ 2 = 2%, and the equivalent monthly rate is (1.02)^(1/6) − 1 = 0.003306, or about 0.331%. Dividing 4% by 12 (0.333%) ignores the compounding convention, and 0.327% is the rate for annual compounding.
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