Question

The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. 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

Answer 1

Answer and Explanation:

The computation of the nominal, periodic, and effective interest rates for this investment opportunity is shown below:

The Nominal rate is 4.40%

The Periodic rate is = 4.40% ÷ 4 = 1.10%

And,  

The Effective annual rate is

= (1+1.10%)^4 - 1

= 4.473%

hence, the same is relevant