Question

If a sum of money is compounded quarterly at 5% find the equivalent rate of interest per annum

Answer 1

Answer:

The effective rate would be (1+0.2/4)^4 -1 = 1.05^4 -1= 1.21551 - 1 = 21.551% if paid annually. The total paid is 5% per quarter (or 0.2/4) but the implied compounding (raising to the power of 4) gives the annual equivalent rate (the AER you see quoted for credit cards, loans and the like).