Question

3. If a bank was offering a nominal rate of return of 12% compounded monthly, what is the annual effect interest rate? 4. An annuity salesman showed up at your door and gave you the following offer: His company is willing to give you $10 every week for one year if only you gave him $480 now. Despite him being a door to door salesman, you trust that you would receive your money back. What is the annual rate of return that you would earn by accepting this offer?

Answer 1

The formella for calculating Effective annual rate when compounded monthly is as follows: i= (1+2) - 1 where, (= Effective annual rate 8 = nominal Interest rate n = humber of periods Compounded monthly Given, 8= 12% n = 12 The Effective annual rate when compounded monthy is calculated as follows: i= (1+r)-1 1 = (1 +0.12)2-1 i (1.01)2-1 1 .1268-) i= 0.1268 i= 12.68%

Hence, the required effective annual interest rate is 12.68%.