If the stated rate of interest is 10% and it is compounded monthly,what is the effective annual interest rate?

Question

Quizplus · Accepted Answer

When interest is compounded monthly, the effective annual interest rate is higher than the stated rate because the interest is being earned not only on the principal amount, but also on the interest earned in previous months.

The formula for calculating the effective annual interest rate is:

(1 + (r/n))^n - 1

Where r is the stated annual interest rate and n is the number of compounding periods per year.

Plugging in the values given, we get:

(1 + (0.1/12))^12 - 1 = 0.1047 or 10.47%

Therefore, the best choice is C.

If the Stated Rate of Interest Is 10% and It