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Jabu invests a certain sum of money for 5 years. She receives interest of 12% per annum...

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christiano-cr7 | (Level 1) Salutatorian

Posted July 30, 2013 at 5:28 AM via web

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Jabu invests a certain sum of money for 5 years. She receives interest of 12% per annum compounded monthly for the first two years. The interest rate changes to 14% per annum compounded semi-annually for the remaining term. The money grows to R75 000 at the end of the 5-year period.

Calculate the effective interest rate per annum during the first year.

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embizze | High School Teacher | (Level 1) Educator Emeritus

Posted July 30, 2013 at 5:48 AM (Answer #1)

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Money is invested at 12% annual interest compounded monthly. What is the effective interest rate?

Use `r_("eff")=(1+r_"nom"/m)^m-1` where `r_"eff"` is the effective interest rate (a.k.a. APY annual percentage yield), `r_"nom"` is the nominal interest rate or APR, and m is the number of times compounded per year.

`r_"eff"=(1+.12/12)^12-1~~.1268250301`

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The effective interest rate is approximately 12.68%

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