Question

Wyatt is paying back a loan with a nominal interest rate of 13.62%. If the interest is compounded quarterly, how much greater is Wyatt’s effective interest rate than his nominal interest rate? a. 0.96 percentage points b. 0.40 percentage points c. 0.25 percentage points d. 0.71 percentage points

Answer 1

Answer:

d.  0.71 percentage points

Step-by-step explanation:

13.62 % is .1362 in decimal

  quarterly period compounding makes periodic (quarterly) interes rate

         = .1362/4 = .03405 per period

  FOUR periods in a year

    (1+ .03405)^4 = 1.1433  

            which means effective interest is .1433  or 14.33 %

14.33 - 13.62 = .7115 percentage points difference