Question

An investor makes a 10 year deposit of $6,661. The bank is paying an interest rate of 3% per year, compounding monthly. Calculate "i" (interest rate per period) correct to 2 decimal places (as a %). Please do not enter % into your answer box

Answer 1

The interest rate per period 'i', when compounded monthly on a 3% annual interest rate, is 0.25%. This is calculated by dividing the annual rate by 12, the number of compounding periods in a year.

Step-by-step explanation:

To calculate the interest rate per period, or i, when interest is compounded monthly, we take the annual interest rate and divide it by the number of compounding periods in a year. The bank offers a 3% annual interest rate, compounded monthly, which means we have 12 compounding periods per year. Therefore, to find i, we divide 3% by 12.

The calculation would be: i = (3% / 12) = 0.25% per month. To express this as a percentage correct to two decimal places, we have i = 0.25% which does not need further rounding.