The effective rate that is equivalent to the nominal rate of 8% compounded quarterly is :
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 8.24%
Effective Annual Rate (EAR) = $\left(1+\frac{r}{n}\right)^n-1$
r = nominal annual rate = 8% = 0.08
n = 4 (number of compounding periods)
$EAR=\left(1+\frac{0.08}{4}\right)^4-1$
$=(1.02)^4-1$
$≃1.0824-1=0.0824$
$∴EAR=0.824×\frac{100}{100}$
$≃8.24\%$