Question

Effective Rate Find the effective rate of interest corresponding to a nominal rate of 8.25% par year compounded (a) annually, (b) semiannually, (c) quarterly, and (d) monthly.

Answer 1

(a) 8.25%

(b) 4.125%

(c) 2.75%

(d) 0.6875%

Explanation:

We have given annual rate of interest r = 8.25 %

(A) Annual rate of interest will be 8.25 %

(B) Semiannual rate of interest

For semiannual number of period
`=(12)/(6)=2period`

So rate of interest semiannual will be
`=(8.25)/(2)=4.125`%

(c) Quarterly so number of period
`=(12)/(4)=3period`

So rate of interest semiannual will be
`=(8.25)/(3)=2.75`%

(d) For monthly number of period
`=(12)/(1)=12period`

So rate of interest semiannual will be
`=(8.25)/(12)=0.6875`%