Question

Question 3 10 pts An APR of 18% under monthly compounding gives an EAR of Note: Show your answer in units of percents, use plain numbers with at least two digits after the decimal (e.g., for 12.34%, type 12.34).

Answer 1

Effective annual rate=(1+Nominal interest rate/Number of compounding periods)^(Number of compounding periods) - 1
For monthly compounding the number of compounding periods in a year will be 12
Nominal interest rate is 18%

Effective annual rate=(1+18%/12)^(12) - 1
=(1+18%/12)^(12) - 1
=1.195618171-1
=0.195618171 or 19.56% (Rounded to two decimal places)

So, the effective annual rate is 19.56%