Question

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. b. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.

Answer 1

Answer:

D . The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%

Explanation:

Nominal rate = 5% compunded quaterly

  rate of interest per quarter = 5% / 4

  = 1.25%

  effective rate of interest = ( 1 + 5% / 4 )4 - 1

  = ( 1 + 0.0125)4  - 1

  = 1.05094 - 1

  = 5.094%