Term 3 · Week 1 · Compound Interest

Challenge problem

Challenge

Find the effective annual rate equivalent to 12% compounded monthly. Give your answer as a percentage to two decimal places.

Show step-by-step solution

Answer: 12.68 %

Effective rate $= (1 + \tfrac{0.12}{12})^{12} - 1 = 1.01^{12} - 1$ .
$1.01^{12} \approx 1.126825$ , so the effective rate $\approx 0.126825 = 12.68\%$ .

Common errors to watch for

gm11.t3.w1.c1
Solve problems involving compound interest, including maturity value, future value, nominal rates, and number of terms.