Effective Annual Rate (EAR)
Here, we’ve monthly interest rate (r) = 1.50% per month
Number of compounding period (n) = 12 Months
Therefore, the Effective Interest Rate (EAR) = [1 + r] n − 1
= [1 + 0.015]12 – 1
= [1.015]12 – 1
= 1.195618171 – 1
= 0.195618171 or
= 19.56% (Rounded to 2 decimal place)
“Hence, the Effective Annual Rate (EAR) will be (D). 19.56%”
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