If an insitution says that the interest rate is r% compounded monthly, we say that r% is the nominal rate of interest. The effective rate is the rate that earns the equivalent amount at the end of the year. Here is an example. If I invest $1.00 at 2% compounded monthly, at the end of one year I will have $1.02018. Since the interest earned is $0.0201844.Keeping only five digits after the decimal,the effective rate of interest is 2.018%. To be clear, the nominal rate is 2% but the effective rate is 2.018%.Its not much of a difference ifthe present value is $1, but it is significant if the present valueis, say, one million dollars.

 

For each of the following, determined the effective rate of interest. As in the example, keep only five digits after the decimal. Do not enter the %-sign. 

a-The nominal rate of interest is 0.01 %. If interest is compounded daily, the effective rate is 

b-The nominal rate of interest is 0.06 %. If interest is componded quarterly, the effective rate is

c-The nominal rate of interest is 0.01 % .If interest is compounded continuously, the effective rate is

d-The nominal rate of interest is 0.03 %. If interest is compounded daily, the effective rate is

e-The nominal rate of interest is 0.01 %. If interest is componded quarterly, the effective rate is

f-The nominal rate of interest is 0.02 % .If interest is compounded continuously, the effective rate is

Answer rating: 100% (QA)

a The nominal rate of interest is 001 00001 If interest is compounded daily the effective rate can b... View the full answer