Question

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?a. The periodic rate of interest is 8% and the effective rate of interest is also 8%.b. The periodic rate of interest is 2% and the effective rate of interest is 4%.c. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.d. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.e. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Answer 1

The correct answer is E.

Step-by-step explanation:

Giving the following information:

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly.

Periodic rate= 8% / 4= 2%

The effective rate is= (1+i)^n-1= (1.02^4)-1= 0.0824= 8.24%

The rate is greater because the interest gets "reinvested" earlier.