Mathematics of FinanceMCQPYQ Jun 23Question 1244 of 512
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The nominal rate of interest is 10%\displaystyle 10\% per annum. The interest is compounded quarterly. The effective rate of interest per annum will be:

Options

A10%\displaystyle 10\%
B10.10%\displaystyle 10.10\%
C10.25%\displaystyle 10.25\%
D10.38%\displaystyle 10.38\%
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Correct Answer

Option d10.38%\displaystyle 10.38\%

All Options:

  • A10%\displaystyle 10\%
  • B10.10%\displaystyle 10.10\%
  • C10.25%\displaystyle 10.25\%
  • D10.38%\displaystyle 10.38\%

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Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Nominal interest rate (r\displaystyle r) = 10%\displaystyle 10\% per annum - Compounding Frequency = Quarterly (m=4\displaystyle m = 4) **Step 1: Find the quarterly interest rate (i\displaystyle i)** i=rm=10%4=2.5%=0.025 per quarteri = \frac{r}{m} = \frac{10\%}{4} = 2.5\% = 0.025 \text{ per quarter} **Step 2: Calculate the effective annual interest rate (E\displaystyle E)** E=(1+i)m1E = (1 + i)^m - 1 E=(1+0.025)41E = (1 + 0.025)^4 - 1 E=(1.025)41E = (1.025)^4 - 1 **Step 3: Calculate the value** (1.025)41.103813(1.025)^4 \approx 1.103813 E=1.1038131=0.103813 or 10.38%E = 1.103813 - 1 = 0.103813 \text{ or } 10.38\% Hence, **Option D** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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