Episode 8 — Finance Growth and Decay

Nominal and Effective Interest Rates Question

Learners will be able to:

• Calculate the effective annual interest rate equivalent to a nominal interest rate of 10.5% per annum compounded monthly. • Apply the formula: one plus i is equal to open brackets, one plus i compounded m times divided by m close brackets, all raised to the power of m. • Solve for (i to the power of m) in decimal form using the given nominal interest rate. • Interpret the result of substituting (i to the power of m) into the formula and simplifying. • Express the effective annual interest rate as a percentage.