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 2% and the effective rate of interest is 4%.
B) The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
C) The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
D) The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
E) The periodic rate of interest is 8% and the effective rate of interest is also 8%.

Question

Quizplus · Accepted Answer

The periodic rate of interest is the nominal rate divided by the number of compounding periods per year, which is 8%/4 = 2%. The effective rate of interest is calculated using the formula (1 + nominal rate/number of compounding periods)^(number of compounding periods) - 1, which results in a value greater than 8% for quarterly compounding.

Your Bank Account Pays an 8% Nominal Rate of Interest