Question

Calculate the effective interest rate for each following normal interest rates

a) 3% compounded quarterly. Round to two decimal point

b) 3% compunded month. Round to two decimal point

Answer 1

The effective interest rate is given as

$(1+\frac{i}{n})^{n}-1$

a) at 3% compounded quarterly

n= 4

$=(1+\frac{0.03}{4})^{4}-1$

$=3.03\%$

b) at 3% compounded monthly

n= 12

$=(1+\frac{0.03}{12})^{12}-1$

$=3.04\%$