Question

An investor can invest money with a particular bank and earn a stated interest rate of 8.80%; however, interest will be compounded quarterly. What are the nominal (or stated), periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate 8.80% Periodic rate 6.12% Effective annual rate 9.00%

Answer 1

nominal interest rate = 8.8%

periodic interest rate = 2.2%

the effective interest rate = 9.09%

Step-by-step explanation:

nominal interest rate is the rate given to the investor = 8.8%

periodic interest rate = nominal interest rate / total number of compounding periods per year = 8.8% / 4 = 2.2%

the effective interest rate = (1 + periodic interest rate)ⁿ - 1 = (1 + 8.8%/4)⁴ - 1 = (1 + 8.8%/4)⁴ - 1 = (1 + 2.2%)⁴ - 1 = 1.0909 - 1 = 0.0909 = 9.09%