Question

Barbara invested $12,300 at the Midtown Credit Union at 6% compounded monthly for 7 years. What is the effective rate of this investment? Round to the nearest hundredth of a percent

Answer 1

Answer: the effective rate is 52.04%

Step-by-step explanation:

the formula to calculate the future value with monthly compound interests is:

FV= P[ 1+r/n] ^ (n*t)

Where

FV= Future value

P= Principal or amount of money deposited

r=annual interest rate in decimal form

n= number of times compounded per year

t= time in years

We are only interested in the effective rate, so the relevant formula is:

[ 1+r/n] ^ (n*t) so, we replace [ 1+0.06/12] ^ (12*7)

[ 1+0.005] ^ (84) = 1.5204 we substract

1 to get the effective rate 1.5204-1 and the effective rate is 52.04%