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

= 1.02^{4} - 1

**= 8.24% Approximately**

Feel free to ask in case of any query relating to this question

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