What nominal rate of interest compounded monthly corresponds

What nominal rate of interest, compounded monthly, corresponds to an effective rate of 8.5%? r = % (Round to three decimal places as needed.)

Solution

The formula can be written as:

r = m × [ ( 1 + i)^1/m - 1 ],

where i is the effective rate, r is the stated rate and m is the number of compounding periods.

r = 12[(1+0.085)^(1/12)-1]

= 0.08185

i.e

r = 8.18%