Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?
A) The periodic rate of interest is 8% and the effective rate of interest is also 8%.
B) The periodic rate of interest is 2% and the effective rate of interest is 4%.
C) The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
D) The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
E) The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Question

Quizplus · Accepted Answer

The nominal rate of interest is 8% annually, but since it is compounded quarterly, the periodic rate of interest is 8%/4 = 2% per quarter. The effective annual rate (EAR) is calculated using the formula (1 + periodic rate)^n - 1, where n is the number of compounding periods per year. In this case, EAR = (1 + 0.02)^4 - 1, which is greater than 8%, making option E correct.

Your Bank Account Pays an 8% Nominal Rate of Interest