Toni invests $5,000 at 12% interest, compounded quarterly for 1 year. Calculate the effective interest rate for his investment.
Effective rate of interest (EAR):
The effective rate of interest is the rate that has been adjusted for compounding frequency to reflect annual compounding. Naturally, effective rate would be higher than the quoted rate with compounding frequency of less than a year.
Answer and Explanation:
The formula for EAR is:
Where APR is the quoted rate and n is the compounding frequency.
APR = 12% or 0.12
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fromChapter 7 / Lesson 6