Question

A bank pays interest monthly with an EAR of 6.17%. What is the periodic interest rate applicable per month?

	a.	0.50%.
	b.	0.42%.
	c.	0.48%.
	d.	0.55%.
	e.	0.52%.

Answer 1

Effective annual rate = (1 + Nominal rate / Compounding frequency)^{Compouning frequency} -1

6.17% = (1 + Nominal rate / 12)¹² - 1

1.0617 = (1 + Nominal rate / 12)¹²

(1.0617)^(1/12) = (1 + Nominal rate / 12)

1.0050 = (1 + Nominal rate / 12)

0.005 = Nominal rate / 12  

Nominal rate = 6%

Periodic interest rate = Nominal rate / Compounding frequency

Periodic interest rate = 6% / 12

Periodic interest rate = 0.5%