Question

Effective Rate find the effective rate of interest corresponding to a nominal rate of 9% per year compounded.

(a) annually
(b) semiannually
(c) quarterly
(d) monthly

Answer 1

The effective rate of return can be calculated using formula given below.

ER = (1+I)^n-1

where i is nominal rate and n is number of payment in an year. So

(a) annually

ER = (1+9%)^1 -1= 9% (same)

(b) semiannually

ER = (1+9%/2)^2-1 = 9.2%

(c) quarterly

ER = (1+9%/4)^4-1 = 9.31%

(d) monthly

ER = (1+9%/12)^12-1 = 9.34%