Question

What is the effective annual rate for an APR of 10.60 percent compounded quarterly?

Answer 1

The effective annual rate is 11.03%

Explanation:

The effective interest rate is calculated through the formula:

`r = (1 + i/n)^n - 1`

In this formula, r represents the effective interest rate, i represents the stated interest rate or APR, and n represents the number of compounding periods per year.

For a quarterly compounded interest, n=4. The APR i=10.60%=0.106

Given an APR r, the effective annual rate for a quarterly compound is:

`r = (1 + 0.106/4)^4 - 1=1.0265^4-1`

`r=1.11029-1=0.1103`

The effective annual rate is 11.03%