Question

Charter bank pays a 5.00% nominal rate on deposits, with monthly compounding. what effective annual rate (eff%) does the bank pay?

Answer 1

In order to compute for the effective annual rate, the working equation would be [( 1 + i/n)^n] – 1. The i corresponds to the nominal rate while n is the number of compounding periods per year which in this case is 12. The answer would be 5.116%.