If a bank pays a 4.50% nominal rate,with monthly compounding on deposits,what effective annual rate (EFF%) does the bank pay?
A)3.35%
B)3.72%
C)4.13%
D)4.59%

Question

Quizplus · Accepted Answer

To calculate the effective annual rate (EFF%) we need to use the following formula:

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

where i is the nominal rate and m is the number of compounding periods per year.

Plugging in the given values, we get:

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

EFF% = 0.0469 or 4.69%

Therefore, the closest option is D) 4.59% which is the best choice.

If a Bank Pays a 4