An investor makes a 3 year deposit of $22,346. The bank is paying an interest rate of 13% per year, compounding monthly.

Calculate "i" (interest rate per period) correct to 2 decimal places (as a %).

Please do not enter % into your answer box

Question

An investor makes a 3 year deposit of $22,346.  The bank is paying an interest rate of 13% per year, compounding monthly.

Calculate "i" (interest rate per period) correct to 2 decimal places (as a %).

Please do not enter % into your answer box

BlackTom AI · Accepted Answer

The problem asks for the interest rate per period i, given a nominal annual rate of 13% with monthly compounding.

First, convert the annual rate to a monthly periodic rate by dividing by 12, since there are 12 compounding periods per year: 0.13 / 12 = 0.010833333...

Next, express this periodic rate as a percentage: 0.010833333... is 1.083333...%.

Then, round to two decimal places as required: 1.083333...% rounds to 1.08%.

Finally, note formatting guidance: the answer box should not include the percent sign, so you would enter 1.08.

What this means conceptually is that with monthly compounding, each month the balance grows by about 1.08%, because the annual nominal rate of 13% is being applied 12 times over the year.

BFIN011 Week 2: Practice Quiz

An investor makes a 3 year deposit of $22,346. The bank is paying an interest rate of 13% per year, compounding monthly. Calculate "i" (interest rate per period) correct to 2 decimal places (as a %). Please do not enter % into your answer box

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