quarterly Interest

[Vemuri]

A quarterly interest rate of 5% over a 12 month period is equal to an annual interst rate of approximately how much %?

[dumb.doofus]

I think.. just start with 100 and apply 5% four times..
1st quarter: 105
2nd Quarter: 110.25
3rd Quarter: 115.76
4th Quarter: 121.5

So.. its 21.5%

[rossmj]

Shouldn't need this for the exam but the equation is (1+.05)^4

If it was 5% annual interest and you wanted EAR it would be (1+(5/4*100))^4

[gmat740]

Shouldn't need this for the exam but the equation is (1+.05)^4

If it was 5% annual interest and you wanted EAR it would be (1+(5/4*100))^4

I would completely agree with you, but Is it given that we have to calculate compound interest?

[KICKGMATASS123]

I dont know if this is simple interest or compound interest.

what is the OA?

Thanks
Shruti

[Ian Stewart]

Shouldn't need this for the exam but the equation is (1+.05)^4

You might need that for the exam, in fact. You could easily see a question similar to the following:

If you invest $C at a 20% annual interest rate, compounded quarterly, how much will the investment be worth, in dollars, after one year?

On such a question, you would not need to calculate anything (that would be too time consuming) - you would only need to recognize the calculation you would need to perform. That is, the answer choices would look something like:

A) C(1.05)^4
B) C(1.20)
C) C(1.20)^4
D) C(0.05)^4
E) 4C(1.05)

Compound interest can certainly show up on the GMAT, but if you ever need to compute an actual dollar value, you'll almost certainly only have two compounding intervals in the question (unless the question is only about estimation). Otherwise the calculations get too messy.

[rossmj]

Good point Ian, I did ignore the possibility of the answers being given with an exponent.