You could buy, for $1,000, either a 10%, 10-year, annual payment bond or an equally risky 10%, 10-year semiannual bond. Which would you prefer?

The semiannual bond’s EFF% is:

10.25% > 10% EFF% on annual bond, so buy semiannual bond.

EFF% = (1 + ) - 1

= (1 + ) - 1 = 10.25%.

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