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What is the effective annual rate of interest of 2.1% compounded every three months?
A 6.43% B 8.40% C 8.67% D 10.87%The equation for calculation
{(1+r/n)^n}-1Substituting,
{(1.00525)^4}-1
=0.021
=21%Sir can you tell me what went wrong?
You have assumed that the 2.1% is an annual rate.
The wording of the question implied that 2.1% is charged every 3 months.
So the effective annual rate is (1.021)^4 – 1 = 0.0867 (or 8.67%)
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