Calculate the effective annual interest rate if you are quoted 8% per annum,compounded every three months.
A) 11.10%
B) 8.24%
C) 8.22%
D) 8.00%

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) can be calculated using the formula: $$EAR = (1 + \frac{r}{n})^n - 1$$ where $r$ is the annual nominal interest rate (expressed as a decimal), and $n$ is the number of compounding periods per year. For an 8% interest rate compounded quarterly, $r = 0.08$ and $n = 4$. Plugging these values into the formula gives: $$EAR = (1 + \frac{0.08}{4})^4 - 1 = (1 + 0.02)^4 - 1 \approx 0.0824$$ or 8.24%.

Calculate the Effective Annual Interest Rate If You Are Quoted