Answer:
a. 20.40 %
b. 16.08 %
c. 20.92 %
d. 17.35 %
Explanation:
Effective Annual Interest Rate is the annual rate that if compounded once a year, would give us the same result as the interest per period compounded a number of times per year.
Effective Annual Interest Rate = ( 1 + i/m)^m -1
a. 19% compounded quarterly.
Effective Annual Interest Rate = ( 1 + 0.19/4)^4 -1
= 20.40 %
b. 15% compounded monthly.
Effective Annual Interest Rate = ( 1 + 0.15/12)^12 -1
= 16.08 %
c. 19% compounded daily.
Effective Annual Interest Rate = ( 1 + 0.19/365)^365 -1
= 20.92 %
d. 16% with continuous compounding.
Effective Annual Interest Rate = e^i - 1
= e^(0.16) -1
= 17.35 %
