Page 199 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Answers to questions

Question 5

Equivalent rates of interest

A deposit interest rate is stated as 12% per annum with interest calculated and
added to the deposit every month.

Calculate the effective annual rate of interest.

1% will be calculated every month.
n
Consider the effect on a deposit of $1, using V = P(1 + r)

12
$1 × 1.01 = $1.1268
In other words 12.68% of interest has been added over a year – this is the
effective annual interest rate.

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