Test Index

Time Value of Money

© examsnet.com

Question : 98 of 99

Marks: +1, -0

Nominal rate of Interest

9.9\%

p.a. If Interest is compounded monthly. What will be the effective rate of Interest?

\left(\frac{4033}{4000}\right)^{12}=1.1036

$10.36\%$
$9.36\%$
$11.36\%$
$9.9\%$

Solution:

Concept:

Effective rate =

(1 + \frac{r}{n})^n - 1

, where

r

is nominal rate and

n

is compounding frequency per year.

Explanation:

Nominal rate

r = 9.9\% = 0.099

, compounded monthly (

n = 12

).

Monthly factor:

1 + \frac{0.099}{12} = 1 + 0.00825 = 1.00825 = \frac{4033}{4000}

.

Given

\left(\frac{4033}{4000}\right)^{12} = 1.1036

.

Thus effective rate =

1.1036 - 1 = 0.1036 = 10.36\%

.

Answer:

10.36\%

which corresponds to option A.

© examsnet.com

Go to Question:

Prev Question

Next Question