Question

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

Answer 1

Effective annual rate is 16.31%.

Nominal Rate = 14%

Step-by-step 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%