Multiple choice

For a 10-year deposit, what interest rate payable annually is equivalent of 5% interest rate payable quarterly?

  1. 5.1%

  2. 4.9%

  3. 6.0%

  4. None of these
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A Correct answer
Explanation

Effective annual rate (EAR) for 5% quarterly: (1 + 0.05/4)^4 - 1 = (1.0125)^4 - 1 approx 1.050945 - 1 = 5.0945%. This rounds to 5.1%.

AI explanation

Using the effective annual rate formula for quarterly compounding, the annual growth factor is 1 plus 0.05 divided by 4, all raised to the power of 4. This results in 1.0125 raised to the power of 4, which equals approximately 1.050945. Subtracting 1 from this factor gives an effective annual interest rate of 0.050945, or 5.1 percent.

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