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he number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An investor can invest money with a particular bank and earn a stated interest rate of 15.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity

User Jbafford
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Answer:

1. 15.40%

2. 3.85%

3. 16.31%

Step-by-step explanation:

1. Nominal rate = Interest rate

Nominal rate = 15.40%

The Nominal rate of the investment is 15.40%

2. Periodic rate = Nominal rate / Number of time compounded in year

Periodic rate = 15.40 / 4

Periodic rate = 3.85%

The Periodic rate of the investment is 3.85%

3. Effective interest rate = (1 + Nominal Rate)^n - 1

Effective interest rate = (1 + 015.40%/4)4 - 1

Effective interest rate = (1 + 0.1540/4)^4 - 1

Effective interest rate = (1 + 0.0385)^4 - 1

Effective interest rate = 1.0385^4 - 1

Effective interest rate = 1.16312396 - 1

Effective interest rate = 0.16312396

Effective interest rate = 16.31%

The Effective Annual Rate of the investment is 16.31%

User Shivam Bhusri
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