Question

Your bank account pays a 12 percent nominal rate of interest. The interest is compounded quarterly....

Your bank account pays a 12 percent nominal rate of interest. The interest is compounded quarterly. Which of the following statements is most correct?

A. The periodic rate of interest is 4 percent and the effective rate of interest is greater than 12 percent.
B. The periodic rate of interest is 3 percent and the effective rate of interest is 12 percent.
C. The periodic rate of interest is 3 percent and the effective rate of interest is greater than 12 percent.
D. The periodic rate of interest is 12 percent and the effective rate of interest is greater than 12 percent.
E. The periodic rate of interest is 6 percent and the effective rate of interest is 12 percent.
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Answer #1

Nominal Rate of Interest = 12.00% compounded quarterly

Quarterly Interest Rate = Nominal Rate of Interest / 4
Quarterly Interest Rate = 12.00% / 4
Quarterly Interest Rate = 3.00%

Effective Rate of Interest = (1 + Quarterly Interest Rate)^4 - 1
Effective Rate of Interest = (1 + 0.03)^4 - 1
Effective Rate of Interest = 1.1255 - 1
Effective Rate of Interest = 0.1255 or 12.55%

The periodic rate of interest is 3 percent and the effective rate of interest is greater than 12 percent.

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