CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A deposit offers a stated annual rate of 8% compounded quarterly. The effective annual rate is closest to:
The effective annual rate is about 8.24%. Divide the 8% stated rate by four to get 2% per quarter, then compound four times: 1.02 to the fourth power minus one. Continuous compounding would give 8.33%, and 8.00% ignores compounding.
- A8.00%
- B8.24%Correct
- C8.33%
Explanation
The quarterly rate is 8%/4 = 2%. EAR = (1.02)^4 - 1 = 8.243%. The 8.33% figure is e^0.08 - 1, which applies to continuous compounding, and 8.00% ignores compounding.
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