Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is correct?
A)The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
B)The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C)The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D)The periodic rate of interest is 3% and the effective rate of interest is 6%.

Question

Quizplus · Accepted Answer

The periodic rate of interest is the nominal rate divided by the number of periods per year. In this case, it would be 6% divided by 4 (since interest is compounded quarterly), which gives us a periodic rate of 1.5%.

The effective rate of interest would take into account the compounding and give us a better idea of the actual return we would receive. The formula for effective rate of interest is (1 + periodic rate)^number of periods - 1.

In this case, it would be (1 + 0.015)^4 - 1, which gives us an effective rate of approximately 6.136%. Therefore, choice C is correct.

Your Bank Account Pays a 6% Nominal Rate of Interest