Question

the effective rate equivalent to nominal rate of 6% compounded monthly is​

Answer 1

Step-by-step explanation:

the effective rate equivalent to nominal rate of 6 compounded monthly is

Answer 2

Therefore the required effective annual rate is 0.0616 or 6.16%.

Given:

The nominal rate of interest compounded monthly = 6%

To Find:

The value of the effective annual rate.

Solution:

The given question can be solved very easily as shown below.

Let n = number of periods compounding per year = 12

i = Nominal rate = 6%

r = Effective annual rate

The formula for finding the Effective annual rate is given by,

⇒ r = ( 1 + i/n )ⁿ - 1

On substituting the values of i and n in the above equation, we get,

⇒ r = ( 1 + 6 / 1200 )¹² - 1

⇒ r = ( 1 + 0.005 )¹² - 1

⇒ r = ( 1.005 )¹² - 1

⇒ r = 1.0616 - 1 = 0.0616

Therefore the required effective annual rate is 0.0616 or 6.16%.

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