What annual effective discount rate is equivalent to an annual effective interest rate of 10%?
Correct answer: B. 9.09%
- A. 9.00%
- B. 9.09%
- C. 10.00%
- D. 11.11%
Explanation
The equivalent discount rate is d = i/(1+i). Hence, d = 0.10/1.10 = 0.0909, or 9.09%. The discount rate is lower than the corresponding interest rate because it is calculated on the maturity value.
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