Question

If a nominal interest rate compounded quarterly is 8%, what is the annual effective discount rate?

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Answer 1

The annual effective discount rate is computed as shown below:

= (1 + r / m)^m - 1

r is computed as follows:

= 8% / 4 (Since the interest rate is quarterly compounding, hence divided by 4)

= 2% or 0.02

m is referred to as the number of times compounding happens in a year which is 4 in this case since there are 4 quarters in a year.

So, the annual effective discount rate will be computed as follows:

= (1 + 0.08 / 4)⁴ - 1

= 1.02⁴ - 1

= 8.24% Approximately

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