car loan at an interest rate of 9% compounded monthly to be repaid over 60 months, where 9% is the nominal annual interest rate. Some students incorrectly used 9% as the monthly interest rate. A monthly interest rate of 9% is equivalent to what effective annual interest rate? (a) Effective annual interest rate = 9% (b) Effective annual interest rate = 9% per month x 12 months per year = 108% (c) Effective annual interest rate = 9% per month ÷ 12 months per year = 0.75% (d) Effective annual interest rate = (1 + effective monthly rate)12 – 1 = (1.09)12 – 1 - 181%

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