Your bank account pays a 6% nominal rate of interest. The interest is compounded

Question

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
d. The periodic rate of interest is 3% and the effective rate of interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Explanation / Answer

ans) c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 6% divided by four (since it's compounded quarterly) is equal to 6/4 = 1.5% The effective annual interest rate would be (1+.015)^4 - 1= 0.06136

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