Charter Bank pays a 5.00% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?

Question

Quizplus · Accepted Answer

The formula for calculating the effective annual rate (EFF%) with monthly compounding is:

EFF% = (1 + (nominal interest rate / number of compounding periods))^number of compounding periods - 1

Plugging in the values given:

EFF% = (1 + (0.05 / 12))^12 - 1
EFF% = (1.004167)^12 - 1
EFF% = 0.051161 or 5.12%

Therefore, the correct answer is A) 5.12%.

Charter Bank Pays a 5