Calculate the effective annual interest rate if your bank quotes you 10% per annum,compounded quarterly.
A) 14.01%
B) 10.38%
C) 10%
D) 2.50%

Question

Quizplus · Accepted Answer

The formula to calculate effective annual interest rate is:
Effective Annual Interest Rate = (1 + (r/n))^n - 1
where
r = nominal interest rate (10%)
n = number of compounding periods per year (quarterly = 4)

Plugging in the values, we get:
Effective Annual Interest Rate = (1 + (0.10/4))^4 - 1 = 0.1038 or 10.38%

Therefore, the best choice is B.

Calculate the Effective Annual Interest Rate If Your Bank Quotes