One bank offers you 4% interest compounded semiannually.What is the equivalent rate if interest is compounded quarterly?
A)3.98%
B)3.96%
C)3.92%
D)1.00%

Question

Quizplus · Accepted Answer

The equivalent rate if interest is compounded quarterly is 3.98%. This is because the effective annual rate (EAR) for semiannual compounding is (1 + 0.04/2)^2 - 1 = 1.0404, and the EAR for quarterly compounding is (1 + 0.04/4)^4 - 1 = 1.0406. The equivalent quarterly rate is then 1.0406^(1/4) - 1 = 0.0398, or 3.98%.

One Bank Offers You 4% Interest Compounded Semiannually