Question

What effective annual rate can a bank earn on an APR OF 11.5 percent, compounded monthly?

Answer 1

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SOLUTION

`\begin{gathered} Effective\text{ Annual Rate=\lparen1+}(i)/(n)\text{\rparen}^n-1 \\ i=stated\text{ annual rate=11.5\%=0.115} \\ n=number\text{ of compounded periods=12} \end{gathered}`

Substitution and simplification;

`Effective\text{ Annual Rate=\lparen1+}(0.115)/(12)\text{\rparen}^(12)-1=12.126\text{ \% }`