The effective rate equivalent to a nominal rate of 12% compounded quarterly is: (Given $(1.03)^4=1.1256$)
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 12.56%
Given nominal rate: $r = 12\%$ per annum compounded quarterly
Quarterly rate: $i = \frac{12}{4} = 3\% = 0.03$
Number of compounding periods per year: $n = 4$
Effective annual rate (EAR): $R = (1 + i)^n - 1$
$R = (1 + 0.03)^4 - 1 = (1.03)^4 - 1$
$(1.03)^4 \approx 1.1255$
$R \approx 1.1255 - 1 = 0.1255 = 12.55\%$