Find the effective rate of interest corresponding to a nominal rate of 6%/year compounded annually, semiannually, quarterly, and monthly.
A) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)04% if compounded semi-annually,
6)59% if compounded quarterly,
5)00% if compounded monthly.

B) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)59% if compounded semi-annually,
5)00% if compounded quarterly,
6)17% if compounded monthly.

C) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)09% if compounded semi-annually,
6)14% if compounded quarterly,
6)17% if compounded monthly.

Question

Find the effective rate of interest corresponding to a nominal rate of 6%/year compounded annually, semiannually, quarterly, and monthly. ​
A) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)04% if compounded semi-annually,
6)59% if compounded quarterly,
5)00% if compounded monthly.
​
B) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)59% if compounded semi-annually,
5)00% if compounded quarterly,
6)17% if compounded monthly.
​
C) The effective rate of interest corresponding to a nominal rate of 6%/year is
6)00% if compounded annually,
6)09% if compounded semi-annually,
6)14% if compounded quarterly,
6)17% if compounded monthly.
​

Quizplus · Accepted Answer

The effective rate of interest gives the actual return earned over a year, taking into account the compounding of interest. The higher the effective rate of interest, the better the return. 
From the given options, it can be observed that the effective rate of interest is highest when the compounding is done more frequently. Therefore, in this case, the best choice is option C, which shows that the effective rate of interest is highest when the interest is compounded monthly.

Find the Effective Rate of Interest Corresponding to a Nominal