A bank offers an interest rate of 4% per annum compounded daily(assuming 365-day year). What is the effective rate?
A) 2.88%
B) 4.01%
C) 4.28%
D) 3.04%
E) 4.08%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula EAR = (1 + r/n)^(n*t) - 1, where r is the annual nominal interest rate (0.04 in this case), n is the number of compounding periods per year (365), and t is the time in years (1 year). Plugging in the values, EAR = (1 + 0.04/365)^(365*1) - 1 ≈ 0.0408 or 4.08%.

A Bank Offers an Interest Rate of 4% Per Annum