- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 2. Calculate the Effective Annual Rate

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**CFA Practice Question**

A bank quotes 7.80% with an effective annual interest rate of 8.11%. Is the compounding ______?

A. quarterly

B. monthly

C. daily

**Explanation:**Use the formula 1 + i = (1 + j/m)

^{m}, where i = effective interest rate and j = nominal interest rate. Thus, 1 + 0.0811 = (1 + 0.078/m)

^{m}; solve for m by trial and error.

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**User Contributed Comments**
5

User |
Comment |
---|---|

chamad |
Using BAII: Press ICONV-----Press CLR WORK---NOM=7.8--- TRY FOR I=4, 12 AND THEN You get the correct EFF for 365. |

kamil77 |
Thanks, chamad! |

Drzewes |
For this question: we know its not annual, so it may be daily, monthly or quarterly. It's enough to find the value of effective interest rate for monthly. If the value fits - then it's monthly, if the value is too much - it's quarterly. if the value is smaller - it;s daily |

ksnider |
smart Drzewes |

jdmflcl |
Be careful guys. I got this question wrong because I didn't have my HP12c set to a larger # of significant figures. |