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A nominal 12 per cent compounded monthly gives an effective annual rate of about

  • A.12.75 per cent
  • B.12.68 per cent
  • C.12.00 per cent
  • D.1.00 per cent

Answer: B

The monthly periodic rate is 1 per cent, and raising 1.01 to the twelfth power gives 1.1268. Continuous compounding of the same nominal rate would give 12.75 per cent, which is the ceiling on the effect however often one compounds.

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