Multiple choice

The effective rate of interest corresponding to a nominal rate of 7% p.a. convertible quarterly is

  1. 7%

  2. 7.5%

  3. 7.10%

  4. None of these
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D Correct answer
AI explanation

The effective annual rate is calculated using the formula Effective Rate equals (1 plus R divided by 100 times n) raised to the power of n minus 1, where the nominal rate R is 7% and the number of compounding periods n is 4. Substituting these values gives (1 plus 0.0175) raised to the power of 4 minus 1, which evaluates to 1.07185 minus 1. Converting this to a percentage gives an effective rate of approximately 7.185%, a value not present in the first three options, so the correct choice is None of these.

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