Engineering Board Exam Reviewer · Nominal and Effective Rate of Interest · easy
Given the same nominal rate, which compounding frequency yields a higher effective rate: monthly or quarterly?
- Monthly compounding yields a higher effective rate
- Quarterly compounding yields a higher effective rate
- They yield the same effective rate
- It depends on the principal amount
Answer
A. Monthly compounding yields a higher effective rate
Solution
More frequent compounding increases the effective rate for the same nominal rate, so monthly compounding yields a higher effective rate.
More Nominal and Effective Rate of Interest questions
- Find the nominal rate compounded semi-annually that gives an effective annual rate of 8.16%.
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- Find the nominal rate compounded monthly that is equivalent to an effective rate of 12.68%.
- A bank offers 6% compounded daily (assume 360 days/year). Find the equivalent effective annual rate.