Question

Wyatt is paying back a loan with a nominal interest rate of 13. 62%. If the interest is compounded quarterly, how much greater is Wyatt’s effective interest rate than his nominal interest rate? a. 0. 96 percentage points b. 0. 40 percentage points c. 0. 25 percentage points d. 0. 71 percentage points.

Answer 1

The effective interest rate is greater by 0.71 percentage points as compared to the nominal interest rates.

How to compute the effective interest rate?

Given,

$(r)$Nominal Interest rate =13.62%

$(m)$ compounding period =quarterly, that is 4.

The formula of the effective interest rate will be used:

$\begin{aligned}\text{Effective Interest Rate}&=(1+\frac{r}{m})^m-1\\&=(1+\frac{0.1362}{4})^4-1\\&=(1.10566)^4-1\\&=0.1433\;\text{or}\;14.33\%\end{aligned}$

Now, the difference of the effective interest rate and nominal interest rate will be determined to know the exceeding percentage:

$\begin{aligned}\text{Difference Percentage}&=\text{Effective Interest rate - Nominal Interest rate}\\&=0.1433-0.1362\\&=0.71\end{aligned}$

Therefore, option d. 0.71 percentage points is correct.

Learn more about the effective interest rates, refer to the link:

brainly.com/question/14270693