If the one year rate expressed with semi-annual compounding is 6%, what is the equivalent rate with quarterly compounding.
A) 3.00%
B) 5.87%
C) 5.96%
D) 6.00%

Question

If the one year rate expressed with semi-annual compounding is 6%, what is the equivalent rate with quarterly compounding. 
A) 3.00%
B) 5.87%
C) 5.96%
D) 6.00%

Quizplus · Accepted Answer

To calculate the equivalent rate with quarterly compounding, we need to divide the annual rate by the number of compounding periods in a year (4): 6%/4=1.5%. Then we need to add the quarterly interest to the principal after each quarter, so we need to compound it four times a year. Applying the formula for calculating the equivalent quarterly rate:

(1 + 1.5%/4)^4 - 1 = 5.96%

Therefore, the equivalent rate with quarterly compounding is 5.96%.

If the One Year Rate Expressed with Semi-Annual Compounding Is