If the annual rate is 10%, and the interest is compounded quarterly, what is the effective annual rate?

Name: If the annual rate is 10%, and the interest is compounded quarterly, what is the effective annual rate?
Brand: Quizplus
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Question

Quizplus · Accepted Answer

If the interest is compounded quarterly, then there will be 4 compounding periods in a year. Therefore, the quarterly interest rate is 10%/4 = 2.5%. The effective annual rate can be calculated as:
(1 + 0.025)^4 - 1 = 0.1038 or 10.38%
Therefore, the best choice is C) 10.38%.

If the Annual Rate Is 10%, and the Interest Is