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