Mathematics for FinancePYQ Nov 19Question 1297 of 512
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What is the effective rate of interest if the nominal rate 5%\displaystyle 5\% p.a converted quarterly?

Options

A6.09%\displaystyle 6.09\%
B5.09%\displaystyle 5.09\%
C5.38%\displaystyle 5.38\%
D5.30%\displaystyle 5.30\%
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Correct Answer

✅ Option b — 5.09%\displaystyle 5.09\%

All Options:

  • A6.09%\displaystyle 6.09\%
  • B5.09%\displaystyle 5.09\%
  • C5.38%\displaystyle 5.38\%
  • D5.30%\displaystyle 5.30\%

Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Nominal interest rate (r\displaystyle r) = 5%\displaystyle 5\% per annum - Compounding Frequency = Quarterly (m=4\displaystyle m = 4) **Step 1: Find the quarterly interest rate (i\displaystyle i)** i=rm=5%4=1.25%=0.0125 per quarteri = \frac{r}{m} = \frac{5\%}{4} = 1.25\% = 0.0125 \text{ per quarter} **Step 2: Calculate the effective annual interest rate (E\displaystyle E)** E=(1+i)m−1E = (1 + i)^m - 1 E=(1+0.0125)4−1E = (1 + 0.0125)^4 - 1 E=(1.0125)4−1E = (1.0125)^4 - 1 E≈1.050945−1=0.050945 or 5.09%E \approx 1.050945 - 1 = 0.050945 \text{ or } 5.09\% Hence, **Option B** is the correct answer.

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