A thousand dollars is invested for 7 months at an interest rate of 1% per month. What is the nominal interest rate per year? What is the effective interest rate per compounding period? What is the effective annual interest rate?

Answer and Explanation:

The computation is shown below:

Nominal interest rate is

= 1% × 12 months ÷ 1 year

= 12% per year

Formula is

= {(1 + interest rate)^number of compound period - 1) × 100

And, the effective interest rate per compounding period is

= {(1 + 1%)^7 - 1} × 100

= 7.21%

And, the effective annual interest rate is

= = {(1 + 1%)^12 - 1} × 100

= 12.68%

the answer is a.

by: nicholas dooley