Mathematics of FinanceMCQMTP Nov 20/ RTP Sep 24Question 1311 of 512
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The effective rate of interest for one-year deposit corresponding to a nominal 7%\displaystyle 7\% rate of interest per annum convertible quarterly is

Options

A7%\displaystyle 7\%
B7.5%\displaystyle 7.5\%
C7.4%\displaystyle 7.4\%
D7.18%\displaystyle 7.18\%
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Correct Answer

Option d7.18%\displaystyle 7.18\%

All Options:

  • A7%\displaystyle 7\%
  • B7.5%\displaystyle 7.5\%
  • C7.4%\displaystyle 7.4\%
  • D7.18%\displaystyle 7.18\%

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Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Nominal interest rate (r\displaystyle r) = 7%\displaystyle 7\% per annum - Compounding Frequency = 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: Calculate the effective annual interest rate (E\displaystyle E)** E=(1+i)m1E = (1 + i)^m - 1 E=(1+0.0175)41E = (1 + 0.0175)^4 - 1 E=(1.0175)41E = (1.0175)^4 - 1 **Step 3: Compute the value** (1.0175)41.071859(1.0175)^4 \approx 1.071859 E=1.0718591=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.

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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