Interest on a savings account is paid based on some rate r

compounded monthly. You decide to chec...

Interest on a savings account is paid based on some rate r compounded monthly. You decide
to check the bank computation of interest for a particular month during which there were no
deposits or withdrawals. You know the balance B so if you also knew the interest rate r, you
could calculate the interest on the balance as (r/12)B. However, after careful reading of the
bank statement you discover that the statement gives the effective annual interest rate r_e but
does not give the interest rate r. To find r, suppose a (hypothetical) savings account has A
dollars at the beginning of a year. Also suppose there are no deposits or withdrawals during the
year, and interest on the account is paid based on rate r compounded monthly The interest
earned for the first month is (r/12)A, so the initial A dollars in the savings account will become
(1) ()A after 1 month (2) ()A after 2 months, (3) ()A after one year. The effective annual interest
rate r_e is defined such that the deposit of A dollars will grow to the amount (1 + r_e)A after one
year. This must be the same amount as given by (3), so finding r requires solving (4) ()A = (1 +
r_e)A After dividing both sides of (4) by A and then taking the appropriate root, (5) 1 + r/12 =
(Type r_e as re) The solution for r is (6) r = (type r_e as re)

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