Find the effective interest rate if the nominal rate is 6.5% compounded monthly. Round to one decimal place, if necessary.
A) 6.7%
B) 6.9%
C) 7.1%
D) 7.3%

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated using the formula $ (1 + \frac{r}{n})^n - 1 $, where $ r $ is the nominal rate (expressed as a decimal) and $ n $ is the number of compounding periods per year. For a nominal rate of 6.5% (or 0.065) compounded monthly (n = 12), the effective interest rate is $ (1 + \frac{0.065}{12})^{12} - 1 \approx 0.06675 $ or 6.7% when rounded to one decimal place.

Find the Effective Interest Rate If the Nominal Rate Is