Question

Chan deposited money into his retirement account that is compounded annually at an interest rate of 7%. Chan thought the equivalent quarterly interest rate would be 2%. Is Chan correct? If he is, explain why. If he is not correct, state what the equivalent quarterly interest rate is and show how you got your answer. (8 pts)

Answer 1

No, equivalent quarterly rate will be approx 1.75%

Explanation:

Given that Chan deposited money into his retirement account that is compounded annually at an interest rate of 7%.

We know that there are 4 quarters in 1 year.

So to find that equivalent quarterly we will divide given yearly rate by number of quarters.

That means divide 7% by 4.

which gives 1.75%.

But that is different than Chan's though of 2% quarterly interest.

Hence Chan is wrong.