Western Energy makes quarterly deposits into an ac­count reserved for purchasing new equipment 2 years from now. The interest paid on the deposits is 12% per year, compounded monthly. (a) Identify the inter­est period, compounding period, and compounding frequency in the interest period. (b) Calculate the ef­fective annual interest rate, that is, the APY.

What will be an ideal response?


(a) Interest period = year; CP = month; m = 12

(b) in= (1 + r/m)m -1
= (1 + 0.12/12)12 – 1
= 0.12683 (12.683%)

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