What is the effective annual rate of interest, correct to two decimal places, for a nominal rate of 8% per annum compounded quarterly?
Correct answer A. 8.24%
Explanation
Quarterly rate = 2%. Effective rate = (1.02)⁴ − 1 = 0.082432, which is about 8.24% per annum. It is higher than 8% because interest is added every quarter.
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