A bank pays 6% interest per year, compounded quarterly. What is the effective annual rate?
A) 5.76%
B) 6.00%
C) 6.14%
D) 6.23%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: $$EAR = \left(1 + \frac{r}{n}\right)^n - 1$$ where $r$ is the annual interest rate (as a decimal) and $n$ is the number of compounding periods per year. For this question, $r = 0.06$ and $n = 4$, so $$EAR = \left(1 + \frac{0.06}{4}\right)^4 - 1 = \left(1 + 0.015\right)^4 - 1 \approx 0.0614$$ or 6.14%.

A Bank Pays 6% Interest Per Year, Compounded Quarterly