CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A bank quotes a stated annual rate of 6% compounded quarterly. The effective annual rate is closest to:
The effective annual rate is about 6.14%. Quarterly compounding applies 1.5% per quarter, and (1.015) raised to the fourth power equals 1.0614. The stated 6% ignores intra-year compounding, and 6.09% does not correspond to this compounding.
- A6.00%
- B6.09%Correct
- C6.14%
Explanation
EAR = (1 + 0.06/4)^4 − 1 = (1.015)^4 − 1 = 1.06136 − 1 = 6.14%. Wait: 1.015^4 = 1.061364, so 6.14%. The 6.09% figure is wrong; the key must be 6.14%.
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