Test Index

Time Value of Money

Question : 16 of 99

Marks: +1, -0

5\%

interest payable quarterly

Solution:

Concept:

Convert a nominal rate compounded quarterly to an effective annual rate.

Explanation:

The effective annual rate (EAR) formula is:

EAR = \left(1 + \frac{r}{n}\right)^n - 1

where

r = 5\% = 0.05

and

n = 4

(quarterly compounding).

Compute step by step:

\frac{0.05}{4} = 0.0125

1 + 0.0125 = 1.0125

(1.0125)^4 \approx 1.050945

EAR = 1.050945 - 1 = 0.050945 = 5.0945\%

Rounded to one decimal place,

5.0945\% \approx 5.1\%

Answer:

5.1\%

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