Question

An interest rate expressed as "1.5% per month" is exactly the same as:

Select one:
a. 18% annual effective interest
b. 18% interest compounded monthly
c. 4.5% effective interest per quarter
d. No correct answer is provided.

Please help me as fast as possible please. Thanks!

Answer 1

Answer is “18% interest compounded monthly”

Monthly Interest Rate = 1.50%

Annual Interest Rate = 12 * Monthly Interest Rate
Annual Interest Rate = 12 * 1.50%
Annual Interest Rate = 18.00%

Effective Annual Rate = (1 + Monthly Interest Rate)^12 - 1
Effective Annual Rate = (1 + 0.0150)^12 - 1
Effective Annual Rate = 1.1956 - 1
Effective Annual Rate = 0.1956 or 19.56%

Quarterly Effective Interest Rate = (1 + Effective Annual Rate)^(1/4) - 1
Quarterly Effective Interest Rate = (1 + 0.1956)^(1/4) - 1
Quarterly Effective Interest Rate = 1.0457 - 1
Quarterly Effective Interest Rate = 0.0457 or 4.57%