Solving for Annual Equivalent Rate

Course: Fundamentals of Financial Planning
Lesson 5: Using the Calculator

Student Question:

I am confused as to how to get the correct answer for number 4.

Jackie invests her bonus at the beginning of this calendar year. If she earns 7% compounded monthly, what is the annual equivalent rate? Round your answer to two decimal places.

I solve for the future value and get 1.07223, but then I’m not sure if I’m supposed to multiply this by something or if I am just not entering the correct numbers.

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Instructor Response:

Good to hear from you. What you’ve solved for when you do the FV (the 1.0723), is the growth of $1. Therefore, if it goes from $1 to $1.0723, then that is a 7.23% growth.  That’s the answer you would select, 7.23%.  There’s nothing more to do! 

So if you arrived at 1.0723, you did everything well!