Calculate effective annual interest rate, Finance Basics

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1st bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you? 

Solution - Calculate effective annual interest rate 

a

Rate of Interest

   

10%

b

Frequency of compunding (monthly)

12

c

Effective annual interest rate

 

10.47%

 

(1+ 10%/12)^12 - 1

     
 

The rate is divided by 12 and power is 12 as the rate

 

is annual and interest is compounded monthly.

 

 


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