Question

An interest rate of 17% per year, compounded monthly is (circle one)

a.Effective Annual Rate

b.Nominal Annual Rate

c.Effective Monthly Rate

d.Nominal Monthly Rate

Answer 1

c. Effective monthly rate

When the annual rate is compunded into monthly, it is called as Effective monthly rate.

Interest rates are usually calculated on yearly basis, but when it is broken or divided into monthly, quarterly or semi annually then it gives a more clearer picture. When the annual interest rate is further divided into monthly rate then it gives a perfect analysis and the details can be ascertained on monthly basis which makes the tedious task easy.