Question

Anna’s bank gives her a loan with a stated interest rate of 10.22%. How much greater will Anna’s effective interest rate be if the interest is compounded daily, rather than compounded monthly?

Answer 1

If the interest rate is compounded daily, we have the effective interest rate calculated as:
r = (1 + 0.1022/30)^30 -1
r = 0.1074 or 10.74%

Therefore, the effective interest rate if the compounded daily rather than monthly is 10.74-10.22 = 0.52 points higher.