> How frequently is this deposit compounded?

How frequently is this deposit compounded?

Posted at: 2014-12-05 
This could be a complicated question because one needs to know whether the answer is rounded to 3.04%. The formula to determine the effective rate, z, from the annual rate, r, given the number of compounding periods per year, n, is: z = (1 + r/n) ^ n - 1. We know that n is 1, 2, 4, and 12 for annual, semi, qtrly, and mthly. Given r of 0.03, the effective rates are . . .

n . . Eff rate

1 . . 0.03 (annual)

2 . . 0.030225 (semi-annual)

4 . . 0.030339191 (quarterly)

12. . 0.030415957 (monthly)

Rounded to 2 digits, percentage-wise, the answer is Monthly (compounded 12 times per year) or (d)

But if you want to know how many times per year that 3% is compounded to obtain EXACTLY 3.04%, then you have to solve the following equation for n:

(1 + r/n) ^ n - 1 = z

That is,

(1 + 0.03/n) ^ n - 1 = 0.0304

The only way to do that is by iterations. Doing so, you get 8.41 times per year. So the answer is (e), none of the above.

So is 3.04% rounded or not?

{obviously not annual.} (1 + .03/n)^(1yr * n) = 1.0304 ... and compute each case

EDIT: Either this is from / on a very tricky exam, or it is rounded (which was my assumption = d)

mcacquire gets my thumbs up for thinking about it harder.