Interest Rate Concepts Quiz

What is the main difference between nominal and effective interest rates?

• Effective rate includes compounding periods, nominal rate does not.

• Neither rate includes compounding periods.

• Nominal rate includes compounding periods, effective rate does not.

• Both rates include compounding periods.

If an account pays 8% interest compounded yearly, how much interest will you earn on a $100 investment after one year?

• $12

• $10

• $18

• $8

In the quarterly compounding example, what is the quarterly interest rate if the nominal rate is 8%?

• 1%

• 2%

• 4%

• 8%

After the first quarter in the quarterly compounding example, what is the total amount in the account?

• $100

• $102

• $104

• $106

What is the total interest earned at the end of the second quarter in the quarterly compounding example?

• $8.08

• $4.08

• $2

• $6.08

How much interest is earned at the end of the third quarter in the quarterly compounding example?

• $2.88

• $3.88

• $4.88

• $5.88

What is the total amount in the account at the end of the year in the quarterly compounding example?

• $118.24

• $108.24

• $112.24

• $110.24

How does the effective interest rate compare to the nominal rate when interest is compounded more than once a year?

• Effective rate is the same.

• Effective rate is lower.

• Effective rate is higher.

• Effective rate is unpredictable.

What is the effective interest rate if the nominal rate is 8% and interest is compounded quarterly?

• 8.64%

• 8%

• 8.48%

• 8.24%

What is the formula to calculate the effective interest rate?

• Effective Rate = Nominal Rate / Number of Compounding Periods

• Effective Rate = (1 + Nominal Rate / Number of Compounding Periods) ^ Number of Compounding Periods - 1

• Effective Rate = Nominal Rate * Number of Compounding Periods

• Effective Rate = Nominal Rate + Number of Compounding Periods