A car dealership is currently offering interest rates of 12% p.a. compounding quarterly. What is the effective quarterly rate?
Question
A car dealership is currently offering interest rates of 12% p.a. compounding quarterly. What is the effective quarterly rate?
Solution
The effective quarterly rate can be calculated using the formula for compound interest.
The formula is:
A = P (1 + r/n)^(nt)
Where: A = the amount of money accumulated after n years, including interest. P = the principal amount (the initial amount of money) r = annual interest rate (in decimal) n = number of times that interest is compounded per year t = time the money is invested for in years
In this case, we are looking for the effective quarterly rate, so we need to find the value of r/n.
Given: r = 12% p.a. = 0.12 (in decimal) n = 4 (since interest is compounded quarterly)
So, r/n = 0.12/4 = 0.03 or 3%
Therefore, the effective quarterly rate is 3%.
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