NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
A bank offers a fixed deposit at a nominal rate of 8% per annum compounded quarterly. What is the effective annual rate, approximately?
The effective annual rate is about 8.24%. Quarterly compounding applies 2% each quarter, so the annual growth factor is 1.02 to the power 4, which is 1.0824. Semi-annual compounding would give 8.16%, and 8% is only the nominal rate.
- A8.00%
- B8.16%
- C8.24%Correct
- D8.32%
Explanation
Quarterly rate = 2%. EAR = (1.02)^4 - 1 = 1.082432 - 1 = 8.24%. 8.16% is the EAR for semi-annual compounding (1.04^2 - 1). 8.00% ignores compounding altogether.
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