1st bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?
Solution - Calculate effective annual interest rate
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a
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Rate of Interest
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10%
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b
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Frequency of compunding (monthly)
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12
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c
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Effective annual interest rate
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10.47%
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(1+ 10%/12)^12 - 1
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The rate is divided by 12 and power is 12 as the rate
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is annual and interest is compounded monthly.
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