Question

Wyatt is paying back a loan with a nominal interest rate of 13.62%. If the interest is compounded quarterly, how much greater is Wyatt’s effective interest rate than his nominal interest rate? a. 0.96 percentage points b. 0.40 percentage points c. 0.25 percentage points d. 0.71 percentage points

Answer 1

d. 0.71 percentage points

Explanation:

13.62 % is .1362 in decimal

quarterly period compounding makes periodic (quarterly) interes rate

= .1362/4 = .03405 per period

FOUR periods in a year

(1+ .03405)^4 = 1.1433

which means effective interest is .1433 or 14.33 %

14.33 - 13.62 = .7115 percentage points difference