A credit plan charges interest rate of 36% compounded monthly. Find the effective rate.

Discussion in 'Calculator Requests' started by math_celebrity, Jul 1, 2021.

  1. math_celebrity

    math_celebrity Administrator Staff Member

    A credit plan charges interest rate of 36% compounded monthly. Find the effective rate.

    Calculate Monthly Nominal Rate:
    Monthly Nominal Rate = Annual Rate / 12 months per year
    Monthly Nominal Rate = 36%/12
    Monthly Nominal Rate = 3%

    Since there are 12 months in a year, we compound 12 times to get the effective rate below:
    Effective Rate = (1 + Monthly Nominal Rate as a Decimal)^12 - 1

    Since 3% = 0.03, we have:
    Effective Rate = 100% * ((1 + 0.03)^12 - 1)
    Effective Rate = 100% * ((1.03)^12 - 1)
    Effective Rate = 100% * (1.42576088685 - 1)
    Effective Rate = 100% * (0.42576088685)
    Effective Rate = 42.58%
     

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