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A promissory note with 10% interest obligates the debtor to pay interest monthly. The document expires after six months; calculate the effective rate of interest paid.

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Answer to a math question A promissory note with 10% interest obligates the debtor to pay interest monthly. The document expires after six months; calculate the effective rate of interest paid.

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Frederik
4.6
96 Answers
Given:
- r = 0.10 (10% annual rate),
- n = 12 (monthly compounding).

To calculate the effective interest rate over a 6-month period:
EIR = \left(1 + \frac{0.10}{12}\right)^{12} - 1

This simplifies to:
EIR = \left(1 + \frac{0.10}{12}\right)^{12} - 1
EIR = (1.00833)^{12} - 1
EIR = 1.0512 - 1
EIR = 0.0512

So, the effective interest rate over the 6-month period is approximately 5.12%.

\boxed{EIR \approx 5.12\%}

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