Investing

Interest of 12% per year compounded monthly is roughly equivalent to an interest rate of 12.68% per year compunded yearly when using the formula: A=p(1+r/n)^nt

If you solve the problem the two are equal; how can you derive 12.68% compounded yearly from 12% per year compounded monthly?

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  1. Let the rate compounded yearly be i

    then (1+i)^1 = (1+.12/12)^12
    1+i = 1.01^12
    1+i = 1.126825
    i = .1268..
    so the annual rate is 12.68%

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  2. Thank you very much, that was most helpful.

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