CFA Practice Question

There are 410 practice questions for this study session.

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.

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.
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