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7 September, 06:04

An investor can invest money with a particular bank and earn a stated interest rate of 6.60%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate

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  1. 7 September, 09:22
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    Effective annual rate is 16.31%.

    Nominal Rate = 14%

    Explanation:

    Effective annual rate = [ (1 + 15.40 / 4) ^ 4] - 1

    = [ (1 + 3.85%) ^ 4] - 1

    = 1.1631 - 1

    = 16.31%

    Effective annual rate is 16.31%.

    Solution for question 2

    Nominal Rate = 14%

    Effective annual rate = [ (1 + 14 / 2) ^ 2] - 1

    = [ (1 + 7%) ^ 2] - 1

    = 1.1449 - 1

    = 14.49%

    Effective annual rate is 14.49%.

    Annual rate = 5%
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