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Find the effective annual interest rate r of the given annual interest rate. Round your answer to the nearest 0.01%. 2% compounded quarterly

 Sep 3, 2015
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Find the effective annual interest rate r of the given annual interest rate. Round your answer to the nearest 0.01%. 2% compounded quarterly

 

Compounded quarterly means you divide r by 4 & then by a hundred, thus:

2%=2/400=.005, then you add $1 to it so that it becomes=1.005. That's how much interest you earn per quarter.But 1 year=4 quarters, so we have 1.005^4=1.0201505. That's the copounded interest for 4 quarters or for 1 full year. So now, we subract the $1 we added to it & multiply it by 100 to make it into a percentage, thus:1.0201505-1=.0201505 X 100=2.01505%, which is your annual effective interest rate r. And that's how arrive at an effective annual interest rate.

 Sep 4, 2015

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