Mathematics for FinancePYQ July 21Question 1221 of 512
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What 'I\displaystyle I' denote the actual rate of interest in decimal, and 'n\displaystyle n' denote the number of conversion periods, the formula for computing the effective rate of interest E\displaystyle E is given by.

Options

A(1+I)n\displaystyle (1+I)^n
B(1+I)n−1\displaystyle (1+I)^n-1
C1−(1+I)n\displaystyle 1-(1+I)^n
D(1+I)n\displaystyle (1+I)^n
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Correct Answer

✅ Option b — (1+I)n−1\displaystyle (1+I)^n-1

All Options:

  • A(1+I)n\displaystyle (1+I)^n
  • B(1+I)n−1\displaystyle (1+I)^n-1
  • C1−(1+I)n\displaystyle 1-(1+I)^n
  • D(1+I)n\displaystyle (1+I)^n

Detailed Solution & Explanation

**Conceptual Formula of Effective Rate of Interest** Given: - Actual rate of interest in decimal = I\displaystyle I - Number of conversion periods = n\displaystyle n The effective rate of interest (E\displaystyle E) is defined as the rate that compounded annually yields the same amount of interest as the nominal rate compounded n\displaystyle n times a year. The future value of 1\displaystyle 1 unit at the end of the year under compounding is: A=(1+I)nA = (1 + I)^n The interest earned (Effective Rate of Interest, E\displaystyle E) is: E=(1+I)n−1E = (1 + I)^n - 1 Hence, **Option B** is the correct answer.

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