Question

A bank advertises that car loans are available at a special rate of 5.5% interest for qualified borrowers who also already have a home mortgage loan with the same bank. This ad refers to:

a)The nominal interest rate.

b)The effective interest rate.

c)The real interest rate.

d)The discount rate.

Please explain why.

Answer 1

Option A.

• The nominal interest rate is rate of interest which is calculated by removing the effects of inflation.
• It is usually an interest rate that is charged on the loans provided by the banks.
• These rates are usually charged at a low rate when compared to real interest rates by banks to the consumer's in order to encourage more borrowing activity.
• In the above example, an Ad shows a low interest rate of 5.5% which is charged on the car loans.
• Hence this Ad refers to the nominal interest rate.