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The effective annual rate corresponding to a nominal rate of 8% compounded quarterly is approximately
A8.24%
B8.00%
C8.16%
D8.50%
Answer & Solution
Correct answer: A. 8.24%
1. Effective rate formula: EAR = (1 + r/m)^m - 1.
2. Here r = 0.08 and m = 4 (quarterly).
3. EAR = (1 + 0.02)^4 - 1 = (1.02)^4 - 1.
4. (1.02)^4 = 1.0824 (to 4 d.p.), so EAR = 0.0824 = 8.24%.
_Source: ICAI BoS Foundation Paper 3, Ch 4 'Math of Finance', p.11_
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