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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