Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

The periodic rate of interest is 5%/4 = 1.25%. To calculate the effective rate of interest, we use the formula: 
Effective rate = (1 + (nominal rate / number of compounding periods))^number of compounding periods - 1
= (1 + (5%/4))^4 - 1
= 5.12%
Therefore, the periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. Choice D is the correct answer.

Your Bank Account Pays a 5% Nominal Rate of Interest