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%
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%