According to the method for calculating short-term interest rates from annualized rates, a three-month interest rate of 4% means that the interest rate paid after three months will be ________.
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A. B. C. D. E.B
The rate to be paid over the period is equal to the annual rate multiplied by the length of the period, as a proportion of a year. Thus: 4%(3/12) = 1%.
The method for calculating short-term interest rates from annualized rates involves dividing the annualized rate by the number of compounding periods within a year. In this case, we have a three-month interest rate of 4%.
To determine the interest rate paid after three months, we need to convert the annualized rate to a rate for the specific time period of three months.
The number of compounding periods within a year is typically assumed to be 12 in finance calculations, representing monthly compounding. Therefore, we divide the annualized rate by 12 to obtain the rate for each compounding period.
In this case, we divide 4% by 12 to calculate the rate for one compounding period:
4% / 12 = 0.3333% (rounded to four decimal places)
So, the rate for one compounding period (three months) is approximately 0.3333%.
However, please note that none of the provided answer choices matches the calculated rate. It seems there might be an error in the options, or the question is designed to test your understanding of interest rate calculations.