We need to add the pv of each group of cash flows. The effective rate is the actual rate, or rate that would produce the future value from the pv. 1,102.50 Effective rate is rate that causes pv to grow to fv . Intuitively, the effective rate is higher, because when interest is paid more frequently, you earn more interest on interest . If you compound annually at the effective rate, you get same result as compounding semi-annually at nominal rate.
Interest is compounded quarterly.