Solve the problem.
-The State Employees' Credit Union offers a 1-year certificate of deposit with an APY (or effective rate) of 5.5%. If interest is compounded quarterly, find the actual interest rate. Round to the nearest tenth of a percent.
A) 5.4%
B) 6.4%
C) 5.1%
D) 5.6%

Question

Quizplus · Accepted Answer

The actual interest rate, or nominal rate, can be found using the formula for the effective annual rate (EAR) or APY: $APY = (1 + \frac{r}{n})^n - 1$, where $r$ is the nominal rate and $n$ is the number of compounding periods per year. Rearranging to solve for $r$, we get $r = n[(1 + APY)^{\frac{1}{n}} - 1]$. Plugging in $APY = 0.055$ and $n = 4$ (since interest is compounded quarterly), we find $r \approx 0.054$, or 5.4%.

Solve the Problem. -The State Employees' Credit Union Offers a 1-Year Certificate of 1-Year