NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Anita invests Rs 1,00,000 at a nominal rate of 12% per annum compounded quarterly. What is the approximate effective annual rate (EAR)?
The effective annual rate is about 12.55%. A 12% nominal rate compounded quarterly means 3% per quarter, and (1.03) raised to the power 4 equals about 1.1255. Compounding more often than annually pushes the effective rate above the nominal 12%.
- A12.00%
- B12.55%Correct
- C12.68%
- D13.00%
Explanation
Quarterly rate = 3%. EAR = (1.03)^4 - 1 = 1.12551 - 1 = about 12.55%. 12.00% ignores compounding within the year. 12.68% corresponds to monthly compounding, which is not what is given.
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