Question

14. The effective rate equivalent to nominal rate of 6% compounded monthly is :

a. 6.05

b. 6.16

c. 6.26

d. 6.07​

Answer 1

SOLUTION

TO CHOOSE THE CORRECT OPTION

The effective rate equivalent to nominal rate of 6% compounded monthly is :

a. 6.05

b. 6.16

c. 6.26

d. 6.07

EVALUATION

Here

r = effective annual rate

i = nominal rate

n = number of compounding periods per year

Now i = 6 & n = 12

$\displaystyle\sf{r = { \bigg(1 + \frac{i}{n} \bigg)}^{n} - 1}$

$\displaystyle\sf{ \implies \: r = { \bigg(1 + \frac{6}{1200} \bigg)}^{12} - 1}$

$\displaystyle\sf{ \implies \: r = { \bigg(1 + 0.005 \bigg)}^{12} - 1}$

$\displaystyle\sf{ \implies \: r = { \bigg(1 .005 \bigg)}^{12} - 1}$

$\displaystyle\sf{ \implies \: r = 1.0616 - 1}$

$\displaystyle\sf{ \implies \: r = 0.0616 }$

Hence the required effective rate = 6.16%

FINAL ANSWER

Hence the correct option is b. 6.16

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