Effective Annual Rate Calculation

Consider an investment of $1,000 that earns an annual interest rate of 5% compounded quarterly. Which of the following options correctly represents the effective annual rate (EAR) for this investment?

To calculate the EAR, we can use the formula:

$$ EAR = (1 + \frac{r}{n})^{nt} - 1 $$

Where:

- $r$ = nominal annual interest rate

- $n$ = number of compounding periods per year

- $t$ = number of years

In this problem, $r = 0.05$, $n = 4$, and $t = 1$.