Answer:
The answer is option d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%
Explanation:
Step 1: Determine stated interest rate
The stated interest rate=nominal interest rate=5%
Step 2: Determine periodic interest rate
The periodic interest rate can be expressed as;
periodic interest rate=stated interest rate/number of compounding periods
where;
stated interest rate=5%=5/100=0.05
number of compounding periods=4
replacing;
periodic interest rate=0.05/4=0.0125×100=1.25%
The periodic interest rate=1.25%
Step 3: Determine effective interest rate
The formula for calculating the effective interest rate can be expressed as;
Effective interest rate={(1+i/n)^n}-1
where;
i=stated interest rate=0.05
n=number of compounding periods in a year=4
replacing;
Effective interest rate={(1+0.05/4)^4}-1
Effective interest rate=0.051×100=5.1%
