Question

Find the effective rate corresponding
to the nominal rate. 4% compounded monthly

Answer 1

4.07%

Explanation:

To obtain the effective rate :

We use :

(1 + r/m)^m - 1

r = rate = 4% = 0.04

m = number of compounding times per year = 12

Effeective rate :

(1 + 0.04/12)^12 - 1

1.0407415 - 1

Effective rate = 0.0407415

0.0407415 * 100%

= 4.07%