For a nominal interest rate of 9%, what is the compounding frequency if the periodic interest is 0.75%?
A) 8
B) 12
C) 6
D) 1
E) 24

Question

Quizplus · Accepted Answer

The formula for the periodic interest rate given the nominal interest rate and compounding frequency is:

Periodic interest rate = (1 + nominal interest rate/compounding frequency)^compounding frequency - 1

0.75% = (1 + 9%/n)^n - 1

We need to solve for n. One way to do this is through trial and error, but a quicker way is to use a financial calculator or software. Using the TI-BA II Plus calculator:

- Input: 9 ÷ 12 = 0.75 (nominal interest rate and periodic interest are in annual terms and need to be converted to monthly)
- PV = 0, PMT = 0, FV = 1 (we assume a future value of $1 to simplify the calculations)
- Press the "I/Y" button and then press the "CPT" button followed by "N" (this calculates the number of compounding periods)

The result is 12, indicating that the compounding frequency is monthly. Therefore, the answer is choice B.

For a Nominal Interest Rate of 9%, What Is the Compounding