Calculate the effective annual interest rate corresponding to 9.6% per annum,compounded monthly.
A) 10.03%
B) 9.6%
C) 8.0%
D) 6.9%

Question

Quizplus · Accepted Answer

The formula to calculate effective annual interest rate is: 
Effective annual interest rate = (1 + (nominal interest rate/number of compounding periods))^number of compounding periods - 1

In this case, the nominal interest rate is 9.6% per annum and it's compounded monthly, which means the number of compounding periods is 12. Therefore,

Effective annual interest rate = (1 + 0.096/12)^12 - 1
                                = 0.1003 or 10.03% (approx)

Hence, the best choice is A) 10.03%

Calculate the Effective Annual Interest Rate Corresponding to 9