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Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?1. The periodic rate of interest is 2% and the effective rate of interest is 4%.2. The periodic rate of interest is 8% and the effective rate of interest is also 8%.3. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.4. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.5. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

Question
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
1. The periodic rate of interest is 2% and the effective rate of interest is 4%.
2. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
3. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
4. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
5. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
check_circleAnswer
Step 1

1. The periodic rate of interest calculation is attached 

 

Periodic rate of interest= pr=ar/n
ar= annual interest rate
n=no of time per year interest is compounded
here annual interest rate (ar) = 8%
no of time interest compounded (n) is quarterly=4 times
therefore, periodic interest rate = 8/4=2
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Periodic rate of interest= pr=ar/n ar= annual interest rate n=no of time per year interest is compounded here annual interest rate (ar) = 8% no of time interest compounded (n) is quarterly=4 times therefore, periodic interest rate = 8/4=2

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Step 2

2. Calculation of effective rate of intere...

The effective interest rate is equal to 1
plus the nominal interest rate in
percent divided by the number of
compounding persiods per year n, to
the power of n, minus 1
Therefore, as per question
Nominal interest rate=8%
no of compunding periods per year=4
Effective interest rate=
(1 Nominal Rate n" - 1
help_outline

Image Transcriptionclose

The effective interest rate is equal to 1 plus the nominal interest rate in percent divided by the number of compounding persiods per year n, to the power of n, minus 1 Therefore, as per question Nominal interest rate=8% no of compunding periods per year=4 Effective interest rate= (1 Nominal Rate n" - 1

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