Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?
A) 12.68%
B) 10.00%
C) 10.47%
D) 10.83%

Question

Quizplus · Accepted Answer

The effective annual rate takes into account the fact that the interest is compounded monthly. We can calculate the effective annual rate using the formula:

(1 + r/n)^n - 1

where r is the annual interest rate (10%) and n is the number of times the interest is compounded per year (12, since it is compounded monthly).

Plugging in the numbers, we get:

(1 + 0.10/12)^12 - 1 = 0.1047 or 10.47%

Therefore, the effective rate the bank is charging is 10.47%.

Friendly Bank Offers You a Loan at an Annual Interest