FRM Part I · FRM Exam Part I · Properties of Interest Rates
A bank quotes a 6% per annum rate with quarterly compounding. What is the equivalent annually compounded rate, to the nearest 0.01%?
The equivalent annual rate is about 6.14%. A 6% quarterly-compounded rate earns 1.5% per quarter, and compounding this over four quarters gives 1.015 to the fourth power, or 1.0614, so the effective annual rate is 6.14%.
- A6.00%
- B6.09%Correct
- C6.14%
- D6.18%
Explanation
Quarterly rate is 1.5%. Annual equivalent = (1.015)^4 - 1 = 1.06136 - 1 = 6.136%, which rounds to 6.14%. Re-check: 1.015^2 = 1.030225; squared = 1.061364. So the correct figure is 6.14%, not 6.09%.
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