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effective interest rate - the return on an investment or the rate owed in interest on a loan when compounding is taken into account.

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

A credit plan charges interest rate of 36% compounded monthly. Find the effective rate.
[U]Calculate Monthly Nominal Rate:[/U]
Monthly Nominal Rate = Annual Rate / 12 months per year
Monthly Nominal Rate = 36%/12
Monthly Nominal Rate = 3%
[U]Since there are 12 months in a year, we compound 12 times to get the effective rate below:[/U]
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 = [B]42.58%[/B]

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