A ﬁrm charges its customers 2.33% interest per month. What is the effective interest rate? Please...

Question

Question

A ﬁrm charges its customers 2.33% interest per month. What is the effective interest rate?

Please explain it a step by step.

business finance

Answer 1

Answer #1


The formula to calculate effective interest rate is as under,
Effective Interest rate = [1+Monthly rate] ^ (Number of compounding periods) - 1
Monthly rate = 2.33% i.e.0.0233
Number of compounding periods = 12
Effective Interest rate = [1+0.0233] ^ 12 - 1
Effective Interest rate = 1.318365 - 1
Effective Interest rate = 0.318365
Effective Interest rate = 31.84%

Answer 2

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