help. which one is correct? 3. 1% nominal rate per month is equivalent to an effective...

Question

Question

help. which one is correct?

Answer 1

Answer #1

The effective annual rate of interest formula is given by-

f = (1+ i/n)^n -1, where i is nominal rate of interest and n is number of periods for compounding

Here, compounding is done annually, so n is 1. And i is already given as 1% per month. Annual nominal interest rate would be 1×12= 12%.

The second solution is the correct one.

But do remember the correct formula has period of compounding two times- it divides nominal rate of interest and appears as power too.

Answer 2

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