00:01
Okay, so we are told that a certificate of deposit pays 4 % interest compounded quarterly.
00:12
And we are asked to determine the effective interest rate of this certificate.
00:18
So in order to do that, we are going to need to know the formula for effective interest rate.
00:23
Let's call effective interest rate big i.
00:26
And the formula for this is 1 plus i over n.
00:33
To the n minus one.
00:37
And what these variables stand for, i stands for the annual rate of interest.
00:46
So that is just the interest rate, which for us is going to be 4%.
00:54
And n stands for the number of compounding periods, which basically just means for us, quarterly means four compounding periods per year.
01:13
So for our specific example, what our formula is going to look like once we start putting things in, i equals 1 plus our interest rate is again, 4%.
01:23
Make sure that you transform that percentage into a decimal by moving the decimal point two places to the left.
01:32
And our compounding period is four because our compounding period is quarterly.
01:38
So this is what our formula is going to look like with all of our variables substituted with numbers.
01:45
And now we can start to analyze this a little bit.
01:47
The quantity 0 .04 divided by 4, we can simplify that.
01:52
That is going to be just 0 .01...