Charter Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?
A)3.72%
B)4.13%
C)4.59%
D)5.05%
E)5.56%

Question

Quizplus · Accepted Answer

To calculate the effective annual rate, we use the formula:

EFF% = (1 + r/m)^m - 1

where r is the nominal annual rate, and m is the number of compounding periods per year.

In this case, r = 4.50% and m = 12 (since interest is compounded monthly).

Plugging in the values, we get:

EFF% = (1 + 0.045/12)^12 - 1
EFF% = 0.0456 = 4.56%

Therefore, the closest answer choice is C, 4.59%.

Charter Bank Pays a 4