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Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In
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Answer #1

Effective Annual Rate = (1 + Nominal Rate / n)n - 1

n = number of compounding period

Effective annual rate = (1 + 0.09/2)2

   = (1 + 0.045)2 - 1

= 9.2025 %

Let the nominal rate be X. There are 4 quarters in a year so n = 4

Putting the same in effective annual rate formula :-

0.092025 = (1 + X/4)4-1

1.092035 = (1 + X/4)4

(1.092035)1/4 = 1 + X/4

(1.092035)1/4 - 1 = X/4

1.0223 - 1 = X/4

0.0223 * 4 = X

X = 8.901 %

Effective Annual rate for both the banks 9.2025 %

Nominal annual rate for Bank 2 = 8.901 %

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