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Question

Dr. Fu Manchu has a bank account that has an annual interest rate of 6 percent, but it compounds monthly. If this is equivalent to a bank account that compounds annually at a rate of r percent, then what is r? (Give your answer to the nearest hundredth.)

Accepted Answer

The bank account compounds monthly at an interest rate of 6/12 = 0.5 percent. Therefore, in the course of a year, the bank account compounds annually at a rate of 1.005^12 = 1.061678 . To the nearest hundredth, the interest rate is 6.17 percent.