Problem 901

Given the annual interest rate and the compounding period, find I, the interest rate per compounding period.

12% compounded monthly.

Solution:-

The interest rate per compounding period is i = $\frac{r}{m}$ where r is the annual nominal rate and m is the number of compounding periods per year.

The interest is compounded monthly, so the compounding period is one month. There are 12 months in one year.

m= 12

Divide the annual rate by the number of periods per year.

i= $\frac{r}{m}$

= $\frac{12}{12}$

=1 percent

The interest rate per compounding period is 1 percent per month.