If you want an effective rate of 6 percent, what is an acceptable quoted rate if interest is compounded quarterly?
A) 5.50
B) 5.65
C) 5.87
D) 6.12

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: $$EAR = (1 + \frac{i}{n})^n - 1$$ where $i$ is the nominal rate (quoted rate) and $n$ is the number of compounding periods per year. Rearranging the formula to solve for $i$, given an EAR of 6% (or 0.06) and quarterly compounding ($n = 4$), we get: $$0.06 = (1 + \frac{i}{4})^4 - 1$$ Solving for $i$ gives approximately 5.87%.

If You Want an Effective Rate of 6 Percent, What