An investor can invest money with a particular bank and earn a stated interest rate of 4.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity

1 answer
Question:

An investor can invest money with a particular bank and earn a stated interest rate of 4.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity

Answers

Answer: 1. 4.40%2. 1.10%3. 4.47%Explanation 1. Nominal Interest RateThe Nominal Interest rate is the same as the stated interest rate as it is without having adjusted for any compounding effects. It is therefore 4.40%. 2. Periodic Interest RateThis rate refers to the stated interest rate divided by the number of periods in the year. As the interest is compounded quarterly, it means there are 4 periods in the year. The periodic rate is;= 4.4 / 4= 1.10%3. The Effective Interest RateThis rate takes into account the effect of compounding in a period. The formula is given by;Effective Interest rate=((1 + stated interest / m) ^ m) -1 Where m = compounding periods = (1 + 4.4%/4)⁴ - 1 = 4.47%

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