Find the nominal interest rate that, when compounded monthly, yields an effective interest rate of 6% / year.
A) 5.91%
B) 5.83%
C) 5.84%
D) 5.87%

Question

Quizplus · Accepted Answer

We can use the formula for effective annual interest rate:

(1 + r/12)^12 = 1 + 0.06

Simplifying this equation, we get:

(1 + r/12) = (1 + 0.06)^(1/12)

(1 + r/12) = 1.004867

r/12 = 0.004867

r = 0.004867 x 12

r = 0.058404

So the nominal interest rate that yields an effective interest rate of 6% / year, compounded monthly, is about 5.84% (choice C).

Find the Nominal Interest Rate That, When Compounded Monthly, Yields