Question

Your bank offers you a 16% APR compounded quarterly. What is the effective monthly rate?

Answer 1

Answer : Calculation of Effective Monthly Rate :

For the purpose of calculatiin of effective monthly rate we need to calculate Effecyive Annual rate first.

Effective Annual Rate =[ (1+r)^n -1]

where

r is the rate per period i.e 16% / 4 = 4% or 0.04 (As there are 4 quarters in a year therefore divided by 4)

n is number of periods i.e 4

Effective Annual Rate = [(1+0.04)^4 -1]

= [1.04^4 - 1]

= 1.16985856 -1

= 0.16985856 or 16.98%

Effective Monthly Rate = 16.98% / 12

= 1.415488% or 1.42%