find the effective rate of interest
5% compounded quarterly

Question

anonymous · Answer

hmmm.

anonymous · Answer

there is no principal value so i don't know how to do this one

anonymous · Answer

5.095%

anonymous · Answer

how did you get that?

anonymous · Answer

r  = (1+i/n)^{n} - 1

anonymous · Answer

http://en.wikipedia.org/wiki/Effective_interest_rate#Calculation

anonymous · Answer

what would the i be in this case?

anonymous · Answer

the i is the rate and the n's are "quarterly" or 4 in this case I think..

anonymous · Answer

okay so the i would be what number?

anonymous · Answer

.05 since they want 5%

anonymous · Answer

okay gotcha!!!

anonymous · Answer

thank you!!!

anonymous · Answer

I think...  I'm new to this and just wiki'd it.. so... :/

anonymous · Answer

no you are correct!!!! i checked in the back of my book for the answer and it was 5.095

anonymous · Answer

yea, that's right.  I'm not exactly sure what "effective interest" means though...

anonymous · Answer

I guess it's just an effective way of comparing different interest rates compounded however you choose, quarterly, or annually or whatever..  so you can compare without any principal amount.  Right on.