(2pts) Nominal and effective interest rates A departmental store has offered you
ID: 1202968 • Letter: #
Question
(2pts) Nominal and effective interest rates A departmental store has offered you a credit card that charges interest at 1.6% per month, compounded monthly. What is the nominal interest rate for this credit card? What is the affective annual interest rate? 1. at 1.6%per month, compounded 2. (2 pts) If your credit card calculates interest based on 21% APR, compounded monthly a. What are your monthly interest rate and annual effective interest rate? If you're currently outstanding balances s4000 and you skip payment for two months, what would be the total balance two months from now? b.Explanation / Answer
Answer:
1) Nominal and effective interest rates:
Nominal Interest Rate is quoted based on an annual period and Affective Interest Rate is an actual interest earned or paid in a year or some other time period.
Given the information is:
A credit card charges interest at 1.6% per month
Interest compounding monthly
Suppose that you invest $1 for 1 year
Then, the future value can be calculated as:
Nominal interest rate (in) = $1(1 + 1.6%/12)12
= $1(1.00134)12
= 1.0162
Annual effective interest rate (ia) = (in -1)
ia = 0.0165 (or) 1.62%
2) If your credit card calculates interest based 21% APR, compounded monthly
a. What are your monthly interest rate and annual effective interest rate?
Monthly interest rate (i) = 21%/12
i = 1.75%
Annual effective interest rate (ia) = (1 + 0.0175)12-1
ia = 23.14%
b. If you’re currently outstanding balance $4,000 and you skip payment for two months, what would be the total balance two months from now?
Total Outstanding Balance = $4,000 (F/P, 1.75%, 2)
= $4141.225
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