PRC-2 · Chapter 5 · Question 18 of 50
A commercial bank offers a nominal interest rate of 12% per annum, but compounds it quarterly. What is the true Effective Annual Rate (EAR) generated by this account?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 12.55%
Explanation
The EAR formula is e = (1 + r/m)^m - 1. Here, r = 0.12 and m = 4. e = (1 + 0.03)^4 - 1 = 1.1255 - 1 = 0.1255, which is exactly 12.55%.
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