ACCA MA · Chapter 11 · Question 4 of 10
A loan charges interest of 1.5% per month, compounded monthly. What is the equivalent annual interest rate (to two decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 19.56%
Explanation
Effective annual rate = (1 + monthly rate) to the power 12 - 1 = (1.015) to the power 12 - 1 = 1.1956 - 1 = 19.56%. Simply multiplying 1.5% by 12 gives the nominal rate of 18.00%, which ignores compounding.
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