I just took a math test and one question asked me to find the "effective interest rate" of an account compounded quarterly at 4.25%. I wrote my teacher a note saying "trick question silly, I need a principal amount to do this ;)" and then wrote what it would be in theory if P was 1. Think I got 1.05 or 105%.

You don't need the principal to know the interest rate

Easton Howard

dammit how do I find rate without principal? He gives partial credit so if I did the 105% right I may be in the clear

Chase Hughes

If you had just made the principal amount a variable you would have found the answer. Always assume that information not given to you is a variable.

Aiden Phillips

>account compounded quarterly at 4.25% is this rate yearly?

Nathan Hughes

Quarterly is 1/4 of a year.

Samuel Johnson

It's not like it was an equation, I set it to X originally and didn't know what to do with my graphing calculator from there. What should I have done?

Juan Ramirez

yeah that's how frequently it's compounded, but is the nominal rate on an yearly base? also should the effective interest rate be expressed on a yearly base as well? if it's not specified i'm going to assume they both are. finally how did you get 105% out of the data given to you?

Also, fuck economics for using a term like effective interest implying a yearly duration.

Just make everything a rate and people would still get the question wrong

Oliver Gomez

The post you quoted is wrong

Grayson Sanders

Starting balance: 1.00 Balance after first quarter: 1.0425 2nd:1.0425^2 3rd: 1.0425^3 4th:1.0425^4 = 1.1811.... What is the definition of effective interest if it's not this?

I think it's funny finance yards have to have a formula for every basic word problem they come across.

William Foster

The quarterly rate is 1/4th of 4.25% or 1.0625% Since that a percentage, we divide by 100 to get 0.010625 If you started with a dollar (the amount is arbitrary) after 3 months you have 1.010625 dollars. Your balance increases by the same fraction every 3 months. After a year you have 1.010625^4 = 1.043182154 dollars. The effective interest rate is your gain, converted back into a percentage. 4.3182154 percent

That is, you'd have the same money in the bank if they only compounded yearly at 4.3182154 percent. Hence, "effective rate".

Adam Hall

If you know where I can get 18 percent FDIC insured, please tell me so I can open an account there!

(Actually, given today's rates, I'd happily settle for 4.25% annually.)

Tyler Morgan

It's funny you still get the result wrong despite the babby formula

Hudson Thompson

Doesn't have to be realistic. But the lack of proper grammar is astounding. It literally reads as 4.25 per quarter, not per year.

Blake Smith

I know. I was in a waiting room last week and a "basics of investing" video was playing in the background. The numbers really showed how old the presentation was.

I commented because 18% is so unreasonable. People who "plug & chug" (punch numbers into a formula. Accept whatever comes out.) aren't getting an education at all. A chimp could do that. You're supposed to learn to think!

Elijah Allen

the rate you actual nignog put x for the principle and then find the rate