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Let’s say there is an investment product whose Annual Percentage Rate (APR) is 8%. If this investment product compounds quarterly (that is, four times a year), what will be the Effective Annual Interest Rate (EAR)?

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Answer:

Effective annual interest rate= 8.24%

Explanation:

Giving the following information:

Interest rate= 8% compounded quarterly

First, we need to calculate the nominal quarterly interest rate:

i= 0.08/4= 0.02

Now, the effective annual interest rate:

effective annual interest rate= (1+i)^n - 1

effective annual interest rate= 1.02^4 - 1

effective annual interest rate= 0.824 = 8.24%

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