your investment advisor informs you that you do not need to pay a fee for his services. Instead, he invests your money for one month and keeps all of the proceeds before investing it for you. If your advisor makes and keeps a 1% return on your investment, what is his EAR if the earnings rate could be extrapolated for one year?

Answer: 12.68%

Explanation:

The Effective Annual Interest rate is the nominal interest rate adjusted for the number of compounding periods a financial product will experience in a period of time which is usually a year.

The formula is,

Effective annual interest rate = (1 + (nominal rate / number of compounding periods)) ^ (number of compounding periods) - 1

Plugging in the figures would give,

EAR = (1 + 0.01) ^ 12 - 1

EAR = 1.01^12 - 1

EAR = 12.68%

You might notice that in the bracket I did not divide the 1% by 12. This is because the 1% was already given as the month's interest rate.