Mathematics for FinanceMTP June 24 Series IIIQuestion 3956 of 507
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Nominal rate of interest 9.9%\displaystyle 9.9\% p.a. If interest is compounded monthly. What will be the effective rate of Interest

Options

A9.36%\displaystyle 9.36\%
B10.36%\displaystyle 10.36\%
C11.36%\displaystyle 11.36\%
D9.9%\displaystyle 9.9\%
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Correct Answer

Option b10.36%\displaystyle 10.36\%

All Options:

  • A9.36%\displaystyle 9.36\%
  • B10.36%\displaystyle 10.36\%
  • C11.36%\displaystyle 11.36\%
  • D9.9%\displaystyle 9.9\%

Detailed Solution & Explanation

Given parameters: * Nominal annual interest rate (r\displaystyle r) = 9.9%\displaystyle 9.9\% p.a. =0.099\displaystyle = 0.099 * Compounding frequency (m\displaystyle m) = 12\displaystyle 12 (compounded monthly) The monthly interest rate (i\displaystyle i) is: i=rm=0.09912=0.00825i = \frac{r}{m} = \frac{0.099}{12} = 0.00825 The formula for the effective annual rate of interest (E\displaystyle E) is: E=(1+i)m1E = (1 + i)^m - 1 Substituting the values: E=(1+0.00825)121E = (1 + 0.00825)^{12} - 1 E=(1.00825)121E = (1.00825)^{12} - 1 Let's compute (1.00825)12\displaystyle (1.00825)^{12}: (1.00825)121.103622(1.00825)^{12} \approx 1.103622 Thus: E1.1036221=0.103622=10.36%E \approx 1.103622 - 1 = 0.103622 = 10.36\% The effective annual rate of interest is 10.36%\displaystyle 10.36\%. (Note: While Option B is the mathematically correct option of 10.36%\displaystyle 10.36\%, the exam answer key mistakenly marked Option A as the answer. We provide the exact mathematical proof for 10.36%\displaystyle 10.36\%). Hence, **Option B** is the correct answer.

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