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Which of the following is CORRECT? When discounting an amount to be received in one yearsâ time at a rate that is quoted as 12% compounding quarterly, we can: Select one: A
Which of the following is CORRECT? When discounting an amount to be received in one yearsâ time at a rate that is quoted as 12% compounding quarterly, we can: Select one: A. Discount the amount using an effective monthly rate of 1% where the number of periods is 12. B. Discount the amount using an effective annual rate (EAR) of (1+0.03)^4- 1 =12.5509% where number of periods is 1. C. Discount the amount using the annual rate of 12% where number of periods is 1. D. None of the above
Expert Solution
When discounting an amount to be received in one years time at a rate that is quoted as 12%, compunding quarterly, we can
B. Discount the amount using an Effective annual rate(EAR) of (1+0.03)^4 - 1= 12.5509% where no. of periods is 1.
Since the compunding is done quarterly so we have divided the rate by 4 and multiplied time by 4.
So, rate, r=12/4=3%
Time, n=1*4=4
EAR= (1+r/100)^n - 1
(1+0.03)^4 - 1= 12.5509%
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