A bank pays interest quarterly with an EAR of 8%.What is the periodic interest rate applicable per quarter?

Question

Quizplus · Accepted Answer

Since the EAR is given as 8%, we can use the following formula to find the periodic interest rate:
EAR = (1 + periodic interest rate)^n - 1

Where n is the number of compounding periods per year. Since the bank pays interest quarterly, n = 4.

8% = (1 + periodic interest rate)^4 - 1
1.08 = (1 + periodic interest rate)^4
Taking the fourth root on both sides, we get:

1 + periodic interest rate = 1.0194
periodic interest rate = 0.0194 = 1.94%

Hence, the answer is C.

A Bank Pays Interest Quarterly with an EAR of 8