Calculate effective annual interest rate, Finance Basics

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1^st 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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