Asked by Edith Jimenez on May 19, 2024
Verified
Calculate the effective annual rate for 14.4% compounded monthly.
A) 15.4%
B) 12.8%
C) 16.4%
D) 13.8%
E) 17.1%
Compounded Monthly
Calculating interest earnings using both the initial principal and previously earned interest on a monthly basis.
Effective Annual Rate
The annual interest rate that accounts for compounding over a given period, providing a true reflection of financial costs.
- Gain proficiency in calculating the Effective Annual Rate (EAR) based on nominal and compounded interest rates.
Verified Answer
SK
Shannon KleinMay 20, 2024
Final Answer :
A
Explanation :
The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)^(n*1) - 1, where i is the annual interest rate and n is the number of compounding periods per year. For 14.4% compounded monthly, i = 0.144 and n = 12. Plugging these values into the formula gives EAR = (1 + 0.144/12)^(12*1) - 1 = 0.154 or 15.4%.
Learning Objectives
- Gain proficiency in calculating the Effective Annual Rate (EAR) based on nominal and compounded interest rates.
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