Find the effective interest rate for a 16% compound interest investment with quarterly rests??

Question

jdoe0001 · Answer

that sounds very ambiguous

anonymous · Answer

it's a question in our textbook

mathmate · Answer

"Basically the effective annual rate is the annual rate of interest that accounts for the effect of compounding."

The 16% is assumed to be compounded annually.
If it is compounded quarterly, each quarter will have an interest of 16/4=4%.  However, since it is compounded 4 times in a year, the effective interest rate is (1.04)^4-1