CIMA BA1 · Chapter 13 · Question 3 of 10
A loan charges interest of 2% per quarter, compounded quarterly. What is the effective annual rate of interest (to two decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 8.24%
Explanation
Effective annual rate = (1 + quarterly rate)^4 - 1 = 1.02^4 - 1 = 1.082432 - 1 = 8.24%. It exceeds 8% because interest is earned on interest within the year.
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