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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest

The effective annual rate corresponding to a nominal rate of 8% per annum compounded quarterly is closest to (use (1.02)^4 = 1.0824):

The effective annual rate is 8.24%. A nominal 8% compounded quarterly gives 2% per quarter, and four compounding periods give (1.02)^4 - 1 = 0.0824. This exceeds the nominal 8% because interest is credited and earns interest each quarter.

  1. A8.00%
  2. B8.16%
  3. C8.24%Correct
  4. D8.32%

Explanation

Quarterly rate = 8/4 = 2%. Effective rate = (1.02)^4 - 1 = 1.0824 - 1 = 8.24%. The 8.16% option comes from compounding only twice a year (1.04^2 - 1).

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