What is the effective interest rate for an investment fund that pays 12% interest compounded monthly?
A)1)00%
B)12.12%
C)12.68%
D)14.40%

Question

Quizplus · Accepted Answer

To calculate the effective interest rate, we use the formula:
Effective Interest Rate = (1 + (Nominal Interest Rate / n))^n - 1 
where n is the number of compound periods in a year. So, for this investment fund, n = 12 (12 months in a year) and nominal interest rate = 12%. Substituting these values in the above formula, we get:
Effective Interest Rate = (1 + (0.12 / 12))^12 - 1 = 0.1268 or 12.68%
Therefore, the best choice is C with an effective interest rate of 12.68%.

What Is the Effective Interest Rate for an Investment Fund