Answer & Explanation
We are not given a value of P in this problem, so either pick a value
for P and stick with that throughout the problem, or just let P = P.
We have that t = 1, and r = .055. To find the effective rate of interest,
first find out how much money we have after one year:
A = Pert
A = Pe(.055)(1)
A = 1.056541P.
Therefore, after 1 year, whatever the principal was, we now have 1.056541P.
Next, find out how much interest was earned, I, by subtracting the initial amount of money from the final amount:
I = A − P
= 1.056541P − P
Finally, to find the effective rate of interest, use the simple interest formula, I = Prt. So,
I = Pr(1) = .056541P
.056541 = r.
Therefore, the effective rate of interest is 5.65%