Question

Q3 What is the effective annual interest rate from a bank that offers annual interest of 10% compounded quarterly? A) 10% B) 11.25% C) 10.38% D) 40%

Answer 1

Effective interest rate = ( 1 + annual rate/4)^n*4 - 1

Effective interest rate = ( 1 + 0.1/4)^1*4 - 1

Effective interest rate = 1.1038 - 1

Effective interest rate = 0.1038 or 10.38%