If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the EAR is:
A) 10.38%
B) 10.00%
C) 2.50%
D) 5.0%

Question

Quizplus · Accepted Answer

To calculate EAR (Effective Annual Rate) we use the formula:
EAR = (1 + r/n)^n - 1, where r is the quarterly rate of interest and n is the number of times interest is compounded in a year.

So, for this question, we have:
r = 2.5%
n = 4 (since interest is compounded quarterly)

Plugging these values into the formula, we get:
EAR = (1 + 0.025/4)^4 - 1
EAR = 0.1038 or 10.38%

Therefore, the answer is A) 10.38%.

If the Quarterly Rate of Interest Is 2