Kraig deposited money into a money market account. It has an interest of 12% and is compounded annually. Kraig thought 3% would be the equivalent quarterly interest rate. Is Kraig correct? If he is, explain why. If he is not correct, state what the equivalent quarterly interest rate. Explain.

If the amount is P, with the interest rate of 12%, the interest over the year is:

In this case the quarterly interest rate is:

With the same amount and 3% quarterly rate, the yearly interest would be:

The quarterly interest rate in this case is:

If the quarterly interest rate is r, it should be little less than 3% to yield a 12% yearly rate.

So Kraig is wrong.

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