FRM Part I · FRM Exam Part I · Interest Rates
A bank quotes a nominal annual rate of 8% compounded quarterly. What is the equivalent effective annual rate, to the nearest 0.01%?
The effective annual rate is 8.24%. A quarterly periodic rate of 2% compounded four times gives 1.02 to the fourth power, which is 1.0824, so the annual yield exceeds the 8% nominal rate because of intra-year compounding.
- A8.00%
- B8.24%Correct
- C8.30%
- D8.33%
Explanation
Quarterly rate is 8%/4 = 2%. EAR = 1.02^4 - 1 = 1.082432 - 1 = 8.24%. 8.00% ignores compounding; 8.33% wrongly uses monthly-type compounding or 1/12 error; 8.30% is roughly semiannual-to-monthly confusion (semiannual gives 8.16%).
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