If the stated annual interest rate is 20% and the frequency of compounding is monthly, the effective annual rate (EAR) is closest to:
C is correct. The effective annual rate (EAR) is (1 + Periodic interest rate) n– 1. In this case, the periodic interest rate is 0.20/12 = 0.01667 and the EAR is (1.01667)12– 1 = 0.21939 = 22%.