Your bank account pays a 6% nominal rate of interest. The interest is compounded
ID: 2665045 • Letter: Y
Question
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
d. The periodic rate of interest is 3% and the effective rate of interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.
Explanation / Answer
ans) c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 6% divided by four (since it's compounded quarterly) is equal to 6/4 = 1.5% The effective annual interest rate would be (1+.015)^4 - 1= 0.06136