The effective rate of return equivalent to a nominal rate of 12% per annum compounded quarterly is: [Given that: $(1.03)^4=1.1255$]
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 12.55%
Given nominal rate: 12% per annum compounded quarterly
Quarterly rate: 12% / 4 = 3% = 0.03
Effective annual rate (EAR):
$\text{EAR} = (1 + 0.03)^4 - 1$
Given: $(1.03)^4 = 1.1255$
Therefore:
$\text{EAR} = 1.1255 - 1 = 0.1255 = 12.55\%$