Mathematics for FinancePYQ Jan 21Question 1218 of 512
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The effective rate of interest corresponding to a nominal rate of 7%\displaystyle 7\% p.a. compounded quarterly

Options

A7.5%\displaystyle 7.5\%
B7.6%\displaystyle 7.6\%
C7.7%\displaystyle 7.7\%
D7.18%\displaystyle 7.18\%
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Correct Answer

✅ Option d — 7.18%\displaystyle 7.18\%

All Options:

  • A7.5%\displaystyle 7.5\%
  • B7.6%\displaystyle 7.6\%
  • C7.7%\displaystyle 7.7\%
  • D7.18%\displaystyle 7.18\%

Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Nominal rate of interest (r\displaystyle r) = 7%\displaystyle 7\% per annum - Compounding Frequency = Quarterly (convertible quarterly, m=4\displaystyle m = 4) **Step 1: Find the quarterly interest rate (i\displaystyle i)** i=rm=7%4=1.75%=0.0175 per quarteri = \frac{r}{m} = \frac{7\%}{4} = 1.75\% = 0.0175 \text{ per quarter} **Step 2: Use the effective rate of interest (E\displaystyle E) formula** E=(1+i)m−1E = (1 + i)^m - 1 E=(1+0.0175)4−1E = (1 + 0.0175)^4 - 1 E=(1.0175)4−1E = (1.0175)^4 - 1 **Step 3: Calculate the value** (1.0175)4≈1.071859(1.0175)^4 \approx 1.071859 E=1.071859−1=0.071859 or 7.1859%≈7.18%E = 1.071859 - 1 = 0.071859 \text{ or } 7.1859\% \approx 7.18\% Hence, **Option D** is the correct answer.

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